Could Sprint ditch Nextel? Makes sense

But a second rumor that has the company selling out to Deutsche Telekom doesn't sound as plausible.

Is Sprint Nextel getting ready for a fire sale?

It sure looks that way following speculation around Wall Street on Monday of a possible sale or breakup of the beleaguered wireless operator. First, The Wall Street Journal reported that German phone company Deutsche Telekom was considering buying the company. Later the same day, another Wall Street Journal article cited sources who said Sprint Nextel is considering unloading its Nextel assets, a move that might make the $22.3 billion wireless operator more attractive to potential buyers.

While a Deutsche Telekom sale seems like a long shot, it's not surprising that the company is considering spinning off the Nextel unit. If Sprint Nextel is able to unload the Nextel network, it could open it up for sale to another bidder--just not Deutsche Telekom.

Why? There are three reasons.

Bigger isn't better
According to the WSJ article, Deutsche Telekom is looking to expand international wireless networks as its wireline business declines. In particular, the company is looking to bulk up its U.S. subsidiary, T-Mobile USA, which is among its fastest-growing properties. The company added some 3.6 million subscribers in 2007 for a total of about 28.7 million subscribers.

If T-Mobile USA acquired Sprint Nextel, it would gain an additional 53.8 million subscribers and become the largest U.S. cell operator, surpassing both AT&T and Verizon Wireless, the No. 1 and No. 2 cell phone carriers, respectively, in the country today.

Sprint logo

But making T-Mobile bigger wouldn't necessarily make it better. The main problem is that T-Mobile USA and its European counterpart, T-Mobile, use a different wireless standard than Sprint Nextel. T-Mobile is GSM-based, whereas Sprint uses CDMA and Nextel uses i-DEN.

If Deutsche Telekom tried to merge T-Mobile USA with Sprint Nextel, it would end up with a huge integration nightmare as it tried to accommodate not just two different technologies, but three. In fact, it would essentially be repeating the same mistake that doomed the 2005 merger between Sprint and Nextel.

Sprint Nextel has been bleeding customers since that acquisition, as Nextel customers, in particular, have dumped the company due to poor service. In early 2006, Nextel had roughly 16.6 million subscribers. By the end of 2007, it had about 13.2 million, according to the WSJ article. And some experts think that number could shrink even further to about 5 million to 7 million in two years.

"When you're looking for market share and scale advantages, it's critical that the technology piece works," said Charles Golvin, an analyst with Forrester Research. "And (Deutsche Telekom and Sprint Nextel) don't have that. They'd have a whole bunch of integration issues, just like they did with the Sprint Nextel merger."

Regulatory headaches
Spinning off Nextel could help alleviate some of the integration headaches for a potential buyer. That said, I still don't think Deutsche Telekom would buy Sprint, mainly because I don't think U.S. regulators would accept the deal.

Right now, the U.S. wireless market with four major competitors is viewed as a competitive-market success story. And it's conceivable that U.S. regulators could block the sale between the No. 3 and No. 4 wireless companies, which together would become the No. 1 wireless operator in the country. Additionally, it's likely that U.S. regulators wouldn't like the deal, because it would mean that a foreign company--Deutsche Telekom--would control the largest wireless communications network in the country, something security experts probably wouldn't like.

Better options elsewhere
That said, spinning off Nextel could help attract other bidders for Sprint. The WSJ reported that the company is examining several options. It has supposedly been in talks with Nextel co-founder Morgan O'Brien, who also founded a public service wireless company called Cyren Call. O'Brien is supposedly putting together a consortium of investors to acquire Nextel, which pioneered the push-to-talk, walkie-talkie phone service. The idea is that the Nextel network and service, which is already used by construction workers, airline workers, and public safety workers, would be combined with other spectrum assets to create a nationwide public safety network.

Cyren Call has been working closely with the Federal Communications Commission to develop a plan for the sliver of spectrum in the 700MHz spectrum auction known as the D block, which was created to help build this nationwide public safety network.

The spinoff of Nextel would finally cement the $35 billion tie-up between Sprint and Nextel as a major failure. Sprint would likely only get a fraction of what it paid for the company if it sold it today. But dumping Nextel would make it easier for Sprint's management team to more nimbly direct its core PCS business. It might even give executives room to focus more attention on its next-generation WiMax network called Xohm.

But word has it that Sprint is also looking to spin off that business. The company has supposedly been in talks with Clearwire, which is also building a nationwide WiMax network, to form a joint venture backed by Intel and Google and possibly cable operators Comcast and Time Warner. The idea is that splitting up all of Sprint Nextel's assets could bring more value to the company than keeping everything together.

Right now, one thing is certain. The Sprint executive team, led by CEO Dan Hesse, seems to be examining all its options. With second-quarter earnings coming out next Monday, there's likely to be more speculation over the next couple of weeks about what the company will do next. So stay tuned.

 

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