ON MANY LEVELS, politics alone appear to weigh heavily against the government approving a merger that would propel German telecommunications giant Deutsche Telekom AG to the top of the U.S. cellphone-carrier ranking through an acquisition of Sprint Nextel Corp.
But perhaps that’s precisely the point. Sprint Nextel CEO Dan Hesse is unabashedly trying to boldly go where none of his predecessors went before. The reinvention of Sprint Nextel – struggling to regain its footing since its $35 billion mangled acquisition of Nextel Communications Inc. in 2005 and attempting to leverage its massive 2.5 GHz spectrum holdings through a WiMAX union with Clearwire Corp. – will be no easy task. In addition to cost-cutting measures along the lines already being pursued by Hesse, a serious Sprint Nextel transformation means aggressively embracing change even when it goes against conventional wisdom.
A DT-Sprint Nextel deal, which may or may not include a Nextel spinoff, is case in point.
Hurdles abound
The reasons are many for why such a transaction likely would not past muster in official Washington. It was no cakewalk getting U.S. officials to approve DT’s $24 billion purchase of then-VoiceStream Wireless Corp. (now T-Mobile USA Inc.) in 2001. A lot has changed since then. Foreign investments in U.S. firms attract even more scrutiny these days stemming from post-9/11 homeland security considerations and economic implications – real or imagined – for American workers. In some circles, anything resembling a foreign-U.S. venture – even a multibillion-dollar government contract that goes to a U.S. ally – can instantly trigger vehement opposition that borders on xenophobia. That’s just the reality of things. The atmosphere can be poisoned all the more when the U.S. economy is misfiring as it now is, a reality not lost on members of Congress and candidates running for president this fall. Indeed, free trade is increasingly on the defensive.
Meantime, critics continue to decry the lackluster status of U.S. broadband penetration on the global stage and warn that America is at risk of losing its high-tech competitive edge to foreign competitors. All told, it makes a DT-Sprint Nextel merger a hard sell.
Then there’s the law. The telecom act limits foreign ownership in U.S. wireless carriers to 25%. However, the FCC can waive the foreign-ownership cap – all the way up to 100% – if telecom regulators deem a particular investment would not be inconsistent with the public interest. FCC foreign-ownership rules also accord favored status to foreign investors from World Trade Organization member countries. Germany is a member of the club.
Beyond the regulatory battle that could ensue from such a deal, a combination of Sprint Nextel’s CDMA/iDEN/WiMAX operations with T-Mobile USA’s GSM/W-CDMA networks would prove a challenge.
“Both Sprint and T-Mobile networks could migrate to [Long Term Evolution] within 2-3 years, while a potential re-branding could help recent [operations] issues,” offered Cowen & Co. “However, a deal is not likely to take place without a strong stomach for complexity, FCC scrutiny and network integration. We believe these issues would be meaningful, but manageable.”
Competitive landscape
Not lost on lawmakers in the Democratic-controlled Congress was the dominance displayed by AT&T Mobility and Verizon Wireless – the top two mobile-phone operators owned by two largest wireline telecom carriers – in the 700 MHz auction that ended in late March. Bidding results caused lawmakers to lament the elimination of a spectrum cap in 2003 and to question whether the Federal Communications Commission’s internal antitrust benchmark – a 95 megahertz spectrum screen – is being ignored.
“In light of the way the current competitive landscape is likely to shape the way policymakers would look at the merger, our sense is that such a deal would be more likely than not to pass muster with the government,” said analysts at Stifel, Nicolaus & Co. Inc. “We continue to believe it is unlikely DT would make a play for Sprint at this point in time – mostly because of the uncertainty over the public-safety spectrum rebanding and the possibility that Sprint’s purchase price will continue to decline.”
However, added analysts, “with the spectrum abyss between T-Mobile and Verizon-AT&T following the 700 MHz auction, and the continued strength of the euro relative to the dollar, the second look they are apparently taking may result in a deal, in our view.”
Neither Sprint Nextel nor DT has denied the merger speculation. It is unclear how the Sprint Nextel-Clearwire WiMAX deal might change any merger considerations, though Sprint Nextel’s Hesse did note during a conference call that the new venture would not impact any other business decisions the company might make.
Cyren Call speculation
And there was the talk that Cyren Call Communications Corp. was looking at enticing investors to fund a run at acquiring Sprint Nextel’s iDEN operations to support a public-safety network. (For those looking to play the odds, Cowen & Co. last week put the chances of an iDEN spinoff at around 50%, while the sale to DT was on the board at around 30%.)
At a minimum, the frenetic activity last week involving Sprint Nextel is only the beginning. Hesse was hired to fix the basket case that is Sprint Nextel. Minimalist management is not in the cards.
Everything has its price
The other half of the equation is Deutsche Telekom, which may see a grand opportunity in acquiring Sprint Nextel at a deeply discounted price.
An International Herald Tribune report suggested DT-Sprint Nextel tie-up might be more than a far-flung, premature rumor.
When asked about a Sprint Nextel purchase during an earnings conference call last week, the paper quoted DT chief executive Ren
