Sprint, T-Mobile Could Combine (S, DTEGY, T, VZ, AAPL, GOOG)

A combination of Sprint Nextel Corp. (NYSE: S) and the T-Mobile USA bit of Deutsche Telekom AG (OTC: DTEGY) would bring together some 67 million subscribers now currently divided almost evenly between the two mobile carriers. That’s big, but still in third place, behind Verizon Communications Inc. (NYSE: VZ) with about 94 million subscribers and AT&T (NYSE: T) with about 93 million. But that wouldn’t be the Sprint/T-Mobile combination’s biggest problem.

There are two bigger issues. First, neither Sprint nor T-Mobile sells the iPhone from Apple Inc. (NASDAQ: AAPL). That’s a very big deal, and one that probably won’t be solved any time soon. Second, T-Mobile has made a decision to chase the low-end of the market. Joining a race to the bottom doesn’t do much for the carrier’s valuation.

According to a report from Bloomberg, the talks are stalled because the companies can’t agree on a valuation for T-Mobile. The report also notes that DT wants a “major stake” in the resulting combination. No big surprises there.

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The valuation issue turns on how much T-Mobile’s customers are worth. A contract (postpaid) customer brought an average monthly revenue in the fourth quarter of $52. A prepaid customer brought in $19. T-Mobile’s blended average revenue per customer was $46. AT&T’s blended rate was nearly $63, and Verizon’s postpaid rate was $53.50.

One way a combined Sprint/T-Mobile could produce a winner is by broadening the customer base for Sprint’s WiMax 4G network. T-Mobile has no 4G network, while AT&T and Verizon are both building out LTE 4G networks at a rapid clip.

T-Mobile is counting on the Android operating system from Google Inc. (NASDAQ: GOOG) to help the company get a smartphone into the market at a $100 price point. And that day is not too far away. T-Mobile gets a slight advantage here from its growing number of prepaid subscribers. As long as the company can meet or beat the price of a monthly data plan from another carrier, and the customer doesn’t have to sign up for a long-term contract, there’s really no reason to switch carriers.

The combination of a high-speed 4G network, low-cost Android-based smartphones, and low-cost carrier data plans may actually make a Sprint/T-Mobile merger work. In fact, a customer could choose mainly to use the WiFi connectivity in a smartphone, forgoing the pricey data plans and going with something like T-Mobile’s limited $10/month data plan when WiFi is not availble. That sort of move would be a real challenge to AT&T or Verizon.

Sprint’s shares are up more than 5% in morning trading, to $4.72. DT’s ADS are up more than 3%.

Paul Ausick