How is Sprint Positioned After T-Mobile-PCS Deal Talks: Secured or Vulnerable?

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

The third largest US telecom operator Sprint (NYSE: S) is working hard to turn the wheels of fortune in its favor. The struggling carrier was weighed down under the burden of heavy debt just a year ago when it started coming up with innovative strategies to come out of the quagmire. The Kansas company wants to be back on track to strengthen itself to take on the duopoly of Verizon and AT&T. This is evident from its effort to introduce Apple’s iPhone on its prepaid billing, consider refinancing debt with lower interest rates to fix its debt burden and offer truly unlimited data plans to its customers. In addition, Dan Hesse, the company’s Chief Executive also expressed that his company is keen on actively participating in some sort of business consolidation.

So who all could be the targets? It could be T-Mobile, MetroPCS (NYSE: TMUS) or Leap Wireless (NASDAQ: LEAP). T-Mobile is over-sized considering Sprint’s pocket and MetroPCS is undoubtedly better than Leap considering its network positioning.

 

The Consolidating Effort
Good acquisition targets don’t remain unnoticed for long. While Sprint was deciding on what its next step should be, T-Mobile made good use of the situation by getting into action with MetroPCS. The two companies are now in merger talks with each other, while Sprint stands bewildered. This is not the first time that Sprint is considering to acquire PCS. Early this year the two were rumored to be involved in some merger talks, but the deal fell through as Sprint’s board did not agree to pay a premium price of $8 billion for the acquisition.

However this time the CDMA carrier doesn’t want to lose PCS in the hands of T-Mobile. The carrier isn’t ready to give up that easily and so it’s rumored to be preparing a counter bid which is expected in a few days. MetroPCS is also a CDMA carrier and so a consolidation between the two would involve less complications as compared to a merger with GSM based T-Mobile.

MetroPCS seems to be an attractive target for larger players looking to expand through consolidation. A bidding war is going to begin once Sprint submits its offer for the company. The number three US carrier is said to be discussing with its advisors whether it should offer a higher price to buy the regional carrier. Sprint should bear in mind the fact that if MetroPCS backs out of the deal with T-Mobile, the regional operator would have to pay $150 million to the company. This means that Sprint would have to counter bid for an amount which is at least $150 more than the price offered by T-Mobile. Even the German firm is ready to fire back Sprint’s counter bid with a better offer if required. A tussle between the two would be interesting to watch. However, is Sprint really at a loss in case T-Mobile and PCS merge?

 

Sprint: Secured or Vulnerable
The prime objective of T-Mobile is to gain competency and add strength to get closer to its bigger rivals. Verizon and AT&T together control approximately 200 million subscribers which is more than the combined customer base of the next 6 carriers. The third positioned carrier, Sprint has 56 million customers under its umbrella while the merged entity of T-Mobile and PCS would have a combined subscriber base of 42.5 million. Sprint has a lead of almost 14 million which is large enough for the merged entity to catch up. Also, another thing in favor of Sprint is that it offers the iPhone which has been benefited the company in terms of adding customers. On the other hand T-Mobile does not carry this smartphone.

The company should remain focused in achieving its Network Vision by building it LTE network. Also by not acquiring PCS, Sprint would save itself from additional debt which would worsen its debt position. And finally, where a consolidating partner is concerned, Sprint could find one in Leap which has a business model similar to PCS’s. However, Leap is not as attractive an acquisition target as PCS which has a better spectrum and LTE position. It might not look that profitable at the moment, but it would come at a much lower price than PCS, it's perfectly suited for Sprint’s pocket, and also adds about 5.9 million customers to the carrier’s existing subscriber base.

 

Concluding Thoughts
If the T-Mobile-PCS deal actually works out, it could put Sprint in a defensive position which could force the carrier to take a leap towards Leap. However, I would rather see the company stay focused in its Network Vision and put its money in buying additional airwaves from fellow players such as Verizon and Dish to expand its network coverage. Deal talks should come as the second priority.


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