Bellevue (CA) – It took Deutsche Telekom more than four years to recover from the acquisition of Voicestream, which is known as T-Mobile USA these days. Now Deutsche Telekom may be forced to acquire another wireless heavyweight to avoid a price war: Sprint Nextel is about twice the size of T-Mobile USA but could substantially cheaper than Voicestream once was.
Analysts from Merrill Lynch today floated the idea that T-Mobile may be in a position to acquire Sprint Nextel, which is believed to have to reduce prices to keep its existing customer base happy and attract new customers. If Sprint Nextel in fact would cut its prices, Merrill Lynch believes that T-Mobile would face the most pressure and “would see the increased urgency to drive market repair.”
Among the four largest cellular service providers in the U.S., Sprint Nextel ranks as #3 with 53.8 million subscribers and T-Mobile as #4 with 29.8 million (including subscribers from SunCom). A combined company, however, would create the largest cellphone company in the US, with a total of 83.6 million subscribers, far ahead of AT&T Wireless’ 70.1 million and Verizon’s 64.0 million.
T-Mobile has come a long way from the time when Deutsche Telekom purchased Voicestream back in July 2000 for $50.7 billion. Back then, the company had 8200 employees, about 2.3 million subscribers and posted negative profit. As of Dec. 31, 2007, T-Mobile USA had 31,655 employees, posted revenues of $19.3 billion for 2007 and a net profit of $1.6 billion for the year.
However, T-Mobile cannot acquire Sprint Nextel on its own. Sprint Nextel is in a completely different category: It has 64,200 employees and posted 2007 revenues of $40.1 billion and a net loss of $29.6 billion (due to a huge write down). Sprint Nextel’s assets are valued at about $64 billion, including $2.2 billion in cash (and a $2.5 billion loan the firm acquired in late February of this year). The good news for T-Mobile may be that based on its stock price, Sprint would be rather cheap: The company’s stock closed at $6.93 on Friday, translating into a $19.33 billion market cap for Sprint Nextel.
Still, T-Mobile currently lists a measly $64 million cash reserve in its latest balance sheet, which means that the mothership would need to pitch in to make a Sprint Nextel deal possible. And Deutsche Telekom has cash-o-plenty: For 2007, the entire company (which employs 244,000 people worldwide) reported revenues of $95.9 billion, generating a cash flow of $21.0 billion. The net profit came in at $4.6 billion and the firm’s warchest currently holds a massive $69.3 billion in cash. Given the cheap dollar these days, Sprint Nextel could turn out to be the bargain of the century for Deutsche Telekom.
Despite the fact that this would be an enormously complex merger, especially because Sprint Nextel is running on a CDMA/iDEN network and T-Mobile on a GSM network, the acquisition would not only take T-Mobile deeper into the U.S phone business, but would also create a strong foothold in the upcoming WiMax world: Sprint Nextel and its Xohm subsidiary are leading this field in the U.S.: According its 2007 financial report, Sprint Nextel poured $577 million into WiMax operations and development last year alone.
All in all, we would not be too surprised if Deutsche Telekom would pursue a Sprint Nextel acquisition. The big problem however are antitrust hurdles and potential concerns of U.S. lawmakers, who raised concerns about a German company owning a major U.S. communications provider already back in 2000.