News this week that German telecom giant Deutsche Telekom AG was looking at making a play for beleaguered U.S. wireless provider Sprint Nextel Corp. caused a stir amongst industry observers as well as the expected impact to the companies’ respective stock prices: DT down; Sprint Nextel up.
While no official word was forthcoming from either party, the innuendo was not the first involving both companies. It also was further proof that foreign carriers have a high interest in U.S. operators and are willing to spend big bucks for a piece of what is seen by many as a slowing market.
DT’s presence in the U.S. market is already filled by its ownership in the nation’s No. 4 operator T-Mobile USA Inc., which it acquired when it purchased VoiceStream Wireless Corp. earlier this decade for $30 billion. The reported bid for Sprint Nextel was rumored to be for something in the neighborhood of $15 billion — drop in the bucket compared to the nearly $70 billion in market cap the company enjoyed for about 1 second following Sprint Corp.’s $35 billion acquisition of Nextel Communications Inc. — and would propel the combined operations into a near dead heat in terms of customers with current heavyweights Verizon Wireless and AT&T Mobility.
Of course there is the issue of both Sprint Nextel and T-Mobile USA current struggles in the market in attracting lucrative postpaid customers with both operators relying on less attractive prepaid customers to fuel their operations. Oh, and there is also the problem of the combined operations having to run virtually every network technology currently known to man: GSM/GPRS/EDGE/WCDMA/HSPA for T-Mobile USA; CDMA2000 1x/EV-DO/WiMAX/iDEN for Sprint Nextel. That might look good for a game of Scrabble. Not so good if network efficiencies are your game.
“From a technical standpoint, this deal could not be any worse,” said Keith Mallinson, founder of wireless industry analyst firm Wiseharbor. “I’m sure DT would like to get a bigger piece of the U.S. telecom pie, but this is a difficult way to do it.”
Mallinson noted that while mergers and acquisitions are a common way for carriers to grow their market share, the technological barriers of such a deal cannot be overlooked.
“Just look at the integration issues Sprint is still going through trying to absorb Nextel,” Mallinson said.
Familiar story
DT is not alone in its current and rumored affinity for the U.S. wireless scene. The nation’s largest operator Verizon Wireless is a joint venture between Verizon Communications Inc. and international heavyweight Vodafone Group plc, a stake Vodafone acquired through the forming of Verizon Wireless in 2000 from the wireless assets of Bell Atlantic, NYNEX Mobile Communications, AirTouch Communications and PrimeCo Communciations. Since then Vodafone has controlled 45% of Verizon Wireless, with the remaining 55% controlled by Verizon.
Vodafone has at times been pressured to sell off its stake in Verizon Wireless, a move that has been encouraged by Verizon in hopes of gaining complete control of its wireless heavyweight. However, every time Vodafone has neared the decision it has backed away claiming it was happy with the current arrangement. The closest the decision ever came to fruition was in 2004 when Vodafone was outbid at the last minute by Cingular Wireless L.L.C. in its attempt to acquire AT&T Wireless Services Inc. If successful, Vodafone would have likely sold off its interest in Verizon Wireless, which is estimated at more than $20 billion, to consumate the deal.
Since that close call, Verizon and Vodafone have made efforts to more closely combine Verizon Wireless’ domestic CDMA network with Vodafone’s international GSM-based properties. Those efforts included pushing handset manufacturers to deliver dual-mode devices that facilitated international roaming and more recently the decision by Verizon Wireless to deploy LTE technology that would align with Vodafone’s next-generation network plans.
Not all foreign ownership of U.S.-based wireless carriers is contentious. Mexico-based America Movil owns prepaid giant Tracfone Wireless Inc., which recently signed a deal to offer a no-contract, unlimited calling and text service using Verizon Wireless’ network through its Straight Talk sub-brand. Tracfone currently counts more than 10 million prepaid customers in the U.S.
Other notable foreign carriers with domestic holdings include Japan’s KDDI Corp., which offers a mobile virtual network operator service targeting Japanese residents either temporarily living in the U.S. or visiting on vacation and rumors of rival NTT DoCoMo Inc. looking to offer a similar service. (NTT DoCoMo at one point owned a double-digit share of AT&T Wireless in an attempt to broaden its corporate reach across the pond before selling off its stake following Cingular’s acquisition.)
Whether the latest rumors surrounding DT and Sprint Nextel turn out to be true or not, analysts are mixed on the value of foreign carriers sinking their investment dollars into the U.S. market.
“Foreign carriers don’t necessarily need to be in the U.S. to be successful,” Mallinson said. “It’s a nice feather in their cap and might help them achieve better economies of scale for their entire operations, but (compared to what they are likely to see from investments elsewhere) the U.S. market for the most part will not be a significant source of their growth in wireless going forward.”
Mallinson added that although he has reservations about growth prospects for T-Mobile USA, Sprint Nextel and foreign investors, he believes there is significant growth potential for subscription numbers and revenues including services such as mobile Internet in the overall U.S. market.
