Should Apple buy Sprint and Hang Up on AT&T and Verizon?

Jonathan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Even though the relationship has been profitable for all, reports are out that AT&T (NYSE: T) and Verizon Communications (NYSE: VZ) might be parting ways with Apple (NASDAQ: AAPL) due to the heavy costs of subsidizing the iPhone sales.  As a result, Sprint-Nextel (NYSE: S) could prove to be a desirable acquisition for Apple.

Both Verizon Communications and AT&T are making data plans more expensive.  That is a tremendous negative for sales of the iPhone, and is a manifestation of a lack of commitment to Apple.  Sprint-Nextel, by contrast, ranks very high in customer satisfaction due to is unlimited data plans.  Sprint-Nextel has already wed itself to the success of the iPhone.  From the pounding it took last October when the iPhone 5 was not introduced and the iPhone 4S came out instead, Sprint-Nextel has recovered strongly.  Now trading around $4.90, Sprint-Nextel is up more than 100% for 2012.  

Apple certainly has plenty of cash and Sprint is selling cheap with a market capitalization of just $14.67 billion.  In 2006, Sprint-Nextel was selling for more than $26 a share.  Apple has over $100 billion in cash and that figure will increase greatly when the iPhone 5 hits the market, which is projected for Sept. 12.

With its resources, Apple could greatly improve what Sprint-Nextel has to offer.  According to an article in The New York Times, for about $50 billion Apple could turn Sprint’s wireless network into “a showcase for the next generation mobile technology.”  Sprint Network Vision isn’t going to cut it for Apple, and the company has the means to make it even better.  In addition, the marketing prowess of Apple in new product introductions is unparalleled.  Sprint would only gain from a closer relationship in this area, and many others.

The Sprint-Nextel and Apple relationship has worked out better than projected.  Many expected that Sprint would stumble due to the terms of the agreement to sell the iPhone.  Rather than fall, however, iPhone sales have allowed for Sprint-Nextel to recover and move forward in a very decisive manner.

Buying Sprint-Nextel would allow for Apple to move forward in many different ways.  Apple could bypass cable operators for its television device.  Parting ways with AT&T and Verizon Communications should prove to be addition through subtraction.  Due to the high subsidy costs, which result in low margins for the sales of the product, employees have been told not to push the iPhone.  That has certainly not been the case with the 40,000 employees of Sprint-Nextel.

In addition to the existing relationship, there are other features that make Sprint-Nextel appealing to Apple.  On a sales basis, it is very attractively priced.  The price-to-sales ratio for Sprint is just 0.42.  That means that every dollar of sales is being registered at more than half off in the share price of Sprint.  By contrast, the price-to-sales ratio for Apple is 4.18.  It is not too difficult to imagine how this premium would enhance the value of Sprint-Nextel if Apple were to acquire it.

Apple is at its peak, at present.  But that will not last forever.  Samsung sells more mobile phones than anyone else in the world and is looking to secure its top ranking.  The new Galaxy smartphone will be unveiled on Aug. 29.  A recent report from Jeffries, an investment bank, stated that Samsung was interested in Research in Motion, due to its Blackberry franchise.  The Blackberry 10 is supposed to be coming out in January 2013.

Coming off a recent victory against Samsung in a patent trial and with the iPhone 5 out soon, Apple is in a dominant position.  But according to the research firm StrategicAnalystics, Samsung sold almost twice as many smartphones in the second quarter as Apple, 50.5 million to 26 million.  With Verizon and AT&T reportedly moving to distance themselves from iPhone sales, it will much more difficult for Apple to catch up to Samsung.  Acquiring Sprint-Nextel will allow for Apple to control more of its future operations, which is a huge net positive in a highly competitive sector.

Fool blogger Jonathan Yates does not own any of the stocks mentioned in this article. The Motley Fool owns shares of Apple. Motley Fool newsletter services recommend Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. If you have questions about this post or the Fool’s blog network, click here for information.

blog comments powered by Disqus