Deustche Telekom and Sprint: A Good Fit?
The “rumor mill” has captured our attention again, as Deustche Telekom (DT) is reportedly pondering a possible bid for Sprint. As the parent company of T-Mobile, DT is already the fourth biggest wireless provider in America. By adding Sprint, the 3rd largest American wireless provider, DT would become the largest American wireless carrier. This deal has some very appealing aspects for DT, but at the same time it would entail a massive reorganization. The proposed deal—were it to be approved—is likely many months away, so here are some initial thoughts on the possible merger.
The timing of the deal could be of major benefit to Deustche Telekom. Sprint’s stock is in a serious swoon—down more than 60% in the last year and near a six year low. Last week, Sprint had its credit rating cut to junk by Standard and Poor’s. Sprint has been losing market share to larger competitors AT&T (T) and Verizon (VZ) and posted a $29.6 billion loss for
2007. Not only is Sprint struggling, but the stock’s valuation is even more compelling to DT right now given the dollar’s relative weakness vis-à-vis the euro. These factors contribute to making the deal more affordable for DT.
Deustche Telekom is looking to expand its presence overseas as it is losing market share in its nat ive Germany because of increased competition. T-Mobile has grown nicely in recent years, and last year Deustche Telekom aggressively bought up wireless spectrum in the auction. Sprint bought a large amount of the spectrum as well, which would also come with the company in the merger likely at a fairly cheap price. DT is looking to grow and adding a long established carrier like Sprint with its large client base could be a giant leap forward.
The potential roadblocks would obviously include regulatory concerns as well as a technology platform mismatch. Part of the reason for Sprint’s poor performance is because of its poor handling of the integration of Nextel’s iDEN technology with Sprint’s CDNA. T-Mobile would add more confusion to the mix with GSM and WiMax platforms. These are the existing networks that would not work well together without a major organizational overhaul. Not to mention that the companies are developing different 4G (next generation) networks, and DT management would have the nightmarish task of figuring out how to most efficiently use these networks and which technology to just do away with.
It will likely be a few months before we know whether there is any truth to these rumors, but these are some of the issues that Deustche Telekom will have to evaluate. If they can successfully manage the technology issues—which is a big if—there is great potential to become a major player in the U.S. telecom market for a song.
Ockham Research Staff @ May 5, 2008
