DT & Sprint: A Bargain in the Balance?

What would Deutsche Telekom AG (NYSE: DT) stand to gain -- or lose -- from buying struggling third-ranked U.S. cellular operator Sprint Nextel Corp. (NYSE: S)? (See A DT Bid for Sprint?)

Analysts say that the German giant would be picking up a bargain that would give it a much larger customer base in the U.S. and add to its spectrum resources for 3G and 4G deployments. DT's existing U.S. cellular subsidiary, T-Mobile USA , runs a different network technology from Sprint, however, adding to the network integration and deployment headache for the operators, since Sprint is already running two networks and trying to deploy a third.

Speculation about a DT bid on Sprint has arisen from a Wall Street Journal report today. The paper says that DT's deliberations were at "a preliminary stage and management may very well turn away," according to the people it quoted. Neither operator has made an official statement on the report.

Sprint, which has dropped from a high of $22 a share a year ago to trade at $8.72 today, may prove too big of a bargain for Deutsche Telekom -- or other carriers -- to resist in the end, says Heavy Reading analyst Gabriel Brown.

"The dollar is low and Sprint is a bargain," he notes. "Although Deutsche Telekom is always being linked to M&A activity," he cautions.

The main thing that Deutsche Telekom would gain in buying Sprint is size. A combined Sprint-T-Mobile would be the largest wireless carrier in the U.S. with around 82 million subscribers, outdoing top-ranked operators AT&T Inc. (NYSE: T) and Verizon Wireless .

The operator would also be able to add to its spectrum pile for deploying wireless broadband services. Sprint has a 2.5 GHz footprint that covers 90 percent of the top markets in the U.S. that it is deploying WiMax in.

Sprint CTO Barry West has complained in the past that this next-gen footprint was being considerably undervalued by investors. Indeed, AT&T and Verizon have paid nearly $20 billion between themselves for less 700 MHz spectrum than Sprint's 2.4 GHz holdings; Sprint's total market cap currently stands at $24 billion in total.

"The key to being an effective carrier in the U.S. in the next five years is having the resources to accelerate the deployment of 3G and beyond faster than rivals and deliver services on those networks," comments Carmi Levy, analyst at AR Communications Inc.

Levy sees the low-cost spectrum and customer base as the major benefits that Sprint can offer. He also warns of integration issues if the operator did buy, however. Sprint is running a CDMA network and a legacy Nextel iDEN network, while trying to deploy WiMax. T-Mobile USA is running a GSM-based network and has just started to deploy 3G services. (See T-Mobile 3G Next Week and Sprint's West: WiMax on Track.)

"This kind of acquisition poses huge integration difficulties," he says.

— Dan Jones, Site Editor, Unstrung