By Jennifer L. Schenker
Rumors that Deutsche Telekom was interested in buying Sprint Nextel first surfaced in March.
In the past week, Sprint Nextel got some more bad news: Its credit rating was cut to junk by Standard & Poor's, and a federal appeals court affirmed the US Federal Communications Commission's decision to force the company to vacate 800 megahertz of frequencies by June 26 to eliminate interference with public safety radio systems -- a blow that could cost the struggling company $3.4 billion.
The most recent woes make Sprint Nextel, which posted a $29.6 billion loss in 2007, more vulnerable than ever to a takeover, analysts say. So it's no surprise that rumors Germany's Deutsche Telekom is interested in buying the company, which first surfaced in March, are once again back in the headlines. Sprint is worth about $22 billion. Neither company would comment on May 5 about the renewed takeover speculation.
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The combination of the two carriers would give Deutsche Telekom the No. 1 mobile share in the US in subscriber terms, ahead of both AT&T and Verizon Wireless. Sprint currently has just over 20 percent of the market, while Deutsche Telekom's T-Mobile USA unit is ranked No. 4, with roughly 11 percent share. Being swallowed by a larger outfit like Deutsche Telekom is just one of various possible fates that may await Sprint Nextel. All of them promise to reshape the telecom landscape in the US.
There is already significant speculation about potential scenarios. Press reports on May 5, for instance, said that talks are once again under way on the potential formation of a new company jointly operated by Sprint Nextel's Zohm division, Seattle startup Clearwire, and various US cable companies. The venture would build and run a new nationwide wireless network based on mobile WiMAX technology, an alternative to traditional cellular that is being heavily pushed by Intel and other backers.
If Zohm's WiMAX business is hived off, the rest of Sprint Nextel might be purchased by T-Mobile, though the companies' existing mobile networks have very little in common in frequencies and technology. Sprint's network -- like that of Verizon Wireless -- is based primarily on the CDMA standard promulgated by Qualcomm, while T-Mobile's network, like AT&T's, uses the European-developed GSM standard. The two incompatible networks could evolve toward each other if both Sprint Nextel and T-Mobile migrate to a next-generation standard called Long Term Evolution, or LTE. (That's the likely path for Verizon Wireless as well, because outside the US, co-owner Vodafone uses mostly GSM and its descendants.)
A Game-Changing Scenario
Although a combined T-Mobile and Sprint Nextel would have the largest number of mobile subscribers, it could still struggle against Verizon and AT&T because they are able to offer so-called quadruple play bundles that include voice, data, TV, and wireless services, which neither Sprint nor T-Mobile currently can.
That's why Berge Ayvazian, chief strategy officer at technology consultancy Yankee Group, isn't ruling out yet another game-changing scenario: that T-Mobile would join with cable companies and Clearwire to absorb both Sprint Nextel's cellular holdings and its Zohm WiMAX businesses. The combined entity would create a new US giant that would be in a better position to compete against Verizon and AT&T. The latter are promoting their new FiOS and U-Verse services as alternatives to traditional cable-TV and Internet offerings.
"This is a moment of change in the US market," says Ayvazian. "The question for T-Mobile is whether they want to remain a fourth-place operator or make a play to become a more significant competitor." With its stock price depressed, Sprint's valuation is compelling at current levels, analysts say. Snapping it up would be a relatively inexpensive way for Deutche Telekom to bolster its market share and footprint in the US.
Looking for More US Growth
Deutsche Telekom Chief Executive Officer René Obermann also is under pressure to present a growth story to shareholders. The company's stock is down 23 percent since January. While other European operators, such as Norway's Telenor and Spain's Telfónica, are placing bets on high-growth emerging markets, Deutsche Telekom has been less adventurous. Its T-Mobile International, which has 119 million customers, is concentrated in only two regions: Europe -- in Germany and in markets (such as Great Britain) that are either saturated or relatively small -- and the US, where analysts say it has little hope of climbing further up the ladder through organic growth.
One reason Deutsche Telekom is looking for more growth in the US is to better exploit its steep investments there. The core of T-Mobile USA dates back to DT's €33 billion ($40 billion) acquisition of VoiceStream in 2000, which was then the US's sixth-largest cellular operator.
The deal nearly brought the company to its knees. As the largest and most controversial acquisition made during a buying spree that began when then-CEO Ron Sommer took the former state-run monopoly public in 1996, it helped saddle DT with €67 billion in debt and contributed to a 90 percent plunge in the company's stock price. Sommer eventually was forced out in 2002 amid protests from the public and politicians and pressure for the company to sell off the US unit. His successor, Kai-Uwe Ricke, who was also later forced out, kept the controversial US business, which has subsequently turned into a moneymaker for the parent company.
Subject of Rumors
Still, some questions that have plagued the US operations from the start continued to haunt it. Rumors surfaced in 2005 that Deutsche Telekom would sell off the unit to pay down debt. Obermann, who was then CEO of T-Mobile International, admitted at the time that the US business needed more investment. To that end, T-Mobile USA has finally launched new third-generation (3G) service in New York, coincidentally on May 5. But the investments made to date are merely keeping the company abreast of rivals -- not allowing it to gain ground.
"The big guys are getting stronger and stronger, and T-Mobile USA is relatively small," says Martin Gutberlet, the Munich-based director of the global mobile sector for technology consultancy Gartner. "The question is whether they have a long-term future in the US."
Gutberlet says he doesn't think buying Sprint Nextel is a good move. "I am struggling to see the business benefits," he says, noting there would be no potential cost savings or synergies in either handsets or networks, due to the incompatible CDMA and GSM systems. It would make more sense, he says, for the German operator to consider buying instead a GSM wireless operator active in high-growth markets, such as Telenor or Egypt's Orascom Telecom.
Drawing Regulators' Attention
If Deutsche Telekom does decide to go ahead with a Sprint Nextel deal it also could face roadblocks from regulators in the US, says Matthew Thornton, a telecommunications analyst at Avian Securities. Given the market share implications of the combination, the deal would likely draw the attention of the Federal Trade Commission as well as the FCC. And the acquisition of a key US wireless network by a foreign buyer would draw scrutiny from Congress and federal agencies.
Andreas Heinold, a financial analyst at Landesbank Baden-Wuerttemberg in Stuttgart, believes those issues could be deal-breakers. But given currency and share price movements, it is the responsibility of Deutsche Telekom's management to give a deal with Sprint Nextel some serious consideration, he says.
With Olga Kharif in Portland, Oregon
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