T-Mobile Deal Is Marathon Not a Sprint

MARCH 9, 2011   the wall street journal

By MARTIN PEERS

Sprint Nextel and Deutsche Telekom would do well to remember that mergers, like marriage, require compromise.

Shareholders of both companies should be encouraged by news that the two are talking about combining Sprint with Deutsche Telekom's T-Mobile USA. If logic prevails, a deal will be struck, eventually. But negotiations for any potential deal would have to overcome obstacles.

With 33.7 million and about 50 million subscribers respectively, T-Mobile and Sprint are too small to compete effectively against U.S. leaders Verizon Wireless and AT&T, which have 94.1 million and 95.5 million, respectively.

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The biggest challenge is likely valuation. While Sprint has more customers, Sanford C. Bernstein noted in late January that T-Mobile is more profitable.

But time isn't of the essence. For instance, while T-Mobile has said it needs more wireless spectrum to give it more capacity for high-speed wireless service, it may feel it is in a reasonably competitive position with what it is now marketing as 4G. But that likely won't be sufficient for more than a few years. Sprint could resolve T-Mobile's spectrum issue through its majority stake in Clearwire, which operates a high-speed wireless network Sprint is using for 4G.

Meanwhile, the technology differences that long complicated a deal are diminishing. Sprint still operates two older networks using different technologies, both distinct from T-Mobile's 3G technology, but one is being phased out.

The biggest challenge is likely valuation. While Sprint has more customers, Sanford C. Bernstein noted in late January that T-Mobile is more profitable. Sprint also is weighed down by nearly $15 billion of net debt. Bernstein calculated, using estimates of 2010 earnings, that T-Mobile's owner should have a 57% equity stake in the combined company.

Each side likely will have to give ground. But there's no question that in a world of giants, Sprint and T-Mobile would be better off together.

Write to Martin Peers at martin.peers@wsj.com