This Telecom Player Could Make Another Strategic Move

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 of the US telecom industry is attracting quite a lot of investor attention. The Sprint (NYSE: S) and Softbank deal, the T-Mobile and MetroPCS (NYSE: TMUS) agreement, and Dish Network’s desire to use its precious swath of spectrum for building a network is a serious threat to Verizon’s (NYSE: VZ) and AT&T’s (NYSE: T) dominance. Sprint in particular is witnessing a remarkable revival from the awful Nextel acquisition to its deal with Japanese telecom player Softbank. After exploring opportunities at home, Softbank wishes to play in the bigger US market and challenge the telecom titans. Softbank chose to do so by acquiring Sprint, while Sprint happily accepted this offer as a stepping stone to success.

What are the other strategic moves undertaken by Sprint?
Sprint made a $480 million strategic acquisition of U.S. Cellular, through which it got access to the latter’s PCS spectrum and 585,000 cellular customers in the Midwest. Other than this, another noteworthy investment that the Kansas carrier made is in Clearwire, where it holds a majority stake. This is of particular interest to Softbank as it shares the same 4G technology as Clearwire, and so the Japanese giant can leverage its expertise.

All this makes it very clear that the third largest US carrier is working very hard to justify its position and give stiff competition to the two wireless leaders in the near future. What are the other options that Sprint could consider?

A possible counterbid for MetroPCS
Recently T-Mobile and MetroPCS agreed to consolidate for synergies. As per the deal, the German parent Deutsche Telekom will own 74% stake in the combined entity by offering $1.5 billion to the shareholders of MetroPCS. Post combination, the new entity would account for 11.7% of the US telecom market with 42.5 million subscribers, in comparison to Sprint’s 15.2%. Verizon and AT&T control over half the market, with 58.5% market share.

There are speculations that Sprint could make a counterbid for MetroPCS as the company’s interest in the regional player doesn’t seem to subside. As per the research note of Guggenheim analyst Shing Yin, there are good chances that Sprint would bid on MetroPCS in the next one to four weeks. If Sprint bid around $12-$13, Deutsche Telekom would face severe difficulty in making a more attractive counter offer to MetroPCS.

With so many deals taking place simultaneously, the industry giants are feeling the heat as the market is consolidating to fight their virtual duopoly.

Threat to the industry giants
Softbank, which has done exceptionally well in the fiercely competitive domestic market, has proposed to combine with Sprint and make it stronger to combat its bigger rivals Verizon and AT&T. The proposal at the moment might not appear as threatening to the two, but the two biggies should bear in mind Sprint’s access to sufficient spectrum. The carrier is in the middle of it Network Vision program, and with deep-pocketed Softbank’s money Sprint could pose a real challenge to Verizon and AT&T in times to come.

My takeaway – a strong combination in the making
Sprint might be the third largest US carrier, but it's way behind the two industry giants in terms of market share and profits. The combination with Softbank would assist the carrier with the much needed finance to fulfill its Network Vision without burdening its debt stressed balance sheet further. The Kansas carrier has been taking wise steps in the recent past and it would be interesting to see if Sprint actually makes a counterbid for MetroPCS. If so, how successful will T-Mobile be to secure its deal with the Richardson carrier? No matter what, one thing for sure is that the smaller industry players are merging to get stronger, making the market more competitive.


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