Whom Could Sprint Acquire?
Rajesh is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The changing dynamics in the telecom industry is working in favor of Sprint (NYSE: S), the third largest US wireless carrier. What a turnaround the company is witnessing. A year back, in early 2011 the wireless operator was considered to be an acquisition target. This year the telecom operator, whose stock has more than doubled, is on the reverse side looking for an appropriate target to combat and challenge the duopoly of the big two: AT&T and Verizon.
Both Verizon and AT&T dominate the telecom industry by holding 80 percent of the postpaid market with a huge customer base of 159 million. While Sprint is focused to upgrade its wireless infrastructure and deploy the 4G LTE, the company’s Chief Executive Dan Hesse also shown interest in some kind of ‘constructive’ consolidation. Now the question is who the appropriate target could be?
The candidates
Sprint had earlier taken over Nextel for $36 billion to become a stronger player. However, things didn’t work for the two due to incompatible network which adversely affected the subscriber base and the bottom-line. Now that the company is recovering and getting better, it is showing signs of a possible acquisition to expand and benefit from synergies of consolidation. So who could the targets be? The target list includes MetroPCS (NYSE: TMUS), Leap Wireless (NASDAQ: LEAP), or the fourth largest US carrier T-Mobile. Let’s take a look at their candidature.
Early this year the company dumped the plan of acquiring Texas based MetroPCS which would have come at the cost of $8 billion as per a couple of sources acquainted with the matter. Now as the company may look for a takeover, it could reconsider buying this $4.1 billion regional carrier. This would help the company to increase its prepaid subscriber base by 9.3 million. Also, other than the subscriber number, Sprint has another good reason to eye this carrier. The company’s network is spread in the major cities of the nation and it serves its subscribers with its 4G LTE network. In addition, the company offers more of certainty when it comes to its rising top-line and bottom-line. Recently at the Goldman Sachs Group Inc. conference held at New York, Roger Linquist, Chief Executive of MetroPCS, said that under the present industry scenario of consolidation, this regional player is ‘belle of the ball’. This shows that MetroPCS could consider being consolidated with a bigger entity such as Sprint. However, the company preferred to keep mum on being asked if it had been approached by Sprint.
The next possible target could be Leap Wireless. The company, which has a market capitalization of $517 million, isn’t profitable at the moment. However it would come at a much lower cost compared to MetroPCS and add 5 million customers under Sprint’s umbrella. Though the subscriber addition would be around half of what MetroPCS offers, but one must note that the cost of acquiring Leap is way less than MetroPCS. Now where profitability is concerned, the company is expected to break even and post profitable numbers soon. Also considering Sprint’s debt heavy balance sheet, this acquisition wouldn’t increase the debt burden.
However, one cannot deny the fact that if Sprint considers Leap, it would come at the expense of losing a brilliant 4G network of PCS which is essential for the company to compete with the top carriers. After considering the regional players, let’s see how profitable could the T-Mobile acquisition be.
The fourth largest US carrier with its 24.1 million customers would undoubtedly help Sprint to reach to the masses and increase scale that would make it much stronger to take on Verizon and AT&T. Had the carrier not been debt-burdened, T-Mobile would have been the best choice to add both spectrum and scale. The deal would have to undergo regulatory scrutiny owing to its size. However, it should not face any roadblock, as in case of the failed AT&T and T-Mobile deal, since the combination of Sprint and T-Mobile would not lead to such concentration of power as AT&T and T-Mobile together.
Final thoughts
A consolidation of the third largest US carrier with another carrier would be desirable in the industry particularly to lessen the concentration of power in the hands of the big two. Sprint is in a transition period and will soon consider a consolidation after upgrading its network. No matter which carrier it targets, one thing is certain that it wants to grow and get stronger to take on Verizon and AT&T instead of having namesake competition with them.
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