Deutsche Telekom (DT) May Offer To Buy Sprint (S)

Deutsche Telekom’s US cellular carrier T-Mobile only has 33 million subscribers. That puts its a distant fourth in the market behind Sprint (S) Verizon Wireless (VOD)(VZ) and AT&T (T). It means that T-Mobile has only 12% of the American market which makes keeping up with the competition in terms of the size of its network and marketing costs extremely difficult.

Deutsche Telekom may remedy its trouble in the US by buying Sprint, which has about 50 million subscribers. The purchase would make its subscriber base much closer to Verizon’s and AT&T’s.

According to a report in the Telegraph, the German telecom has retained Deutsche Bank to advise it on a bid, which could come as early as two weeks from now.

Any bid would be very costly. Sprint’s market cap is relatively small at $10 billion, at least compared to its $35 billion in annual revenue. But, Sprint lost $2.6 billion last year and $487 million in the second quarter. The cellular company is still losing subscribers.

The hardest part of a Sprint offer is what a buyer would do with the firm’s $21 billion in long-term debt. Much of it does not mature for several years, but the company will have to become cash flow positive to justify a buyout.

There are probably costs savings in a T-Mobile tie-up with Sprint. But, marrying two networks can be expensive and disruptive to customers as Sprint itself found out when it bought Nextel.

One of the prizes a buyer of Sprint would get is its new 4G WiMax network being built in partnership Clearwire (CLWR) with the financial backing of a number of huge companies including Intel (INTC). If the project is a success, Sprint will be able to leapfrog its larger competitors by being in the market with the next generation of wireless technology before they are.

Douglas A. McIntyre