Why Deutsche Telekom Wants Sprint Nextel

A credit-rating cut for the No. 3 U.S. wireless carrier leads to renewed speculation that it will be a takeover target for its German rival

by Jennifer L. Schenker

Sprint Nextel (S), the No. 3 U.S. wireless carrier, has been struggling since 2004 when Sprint and Nextel merged. The $35 billion deal is widely seen as a disaster, due to higher-than-expected costs and problems integrating the two companies' different networks and technologies. Sprint Nextel now suffers the highest churn rate of any U.S. operator, and its stock has slumped 40% this year.

In the past week, Sprint Nextel got some more bad news: Its credit rating was cut to junk by Standard & Poor's (MHP), and a federal appeals court affirmed the U.S. Federal Communications Commission's decision to force the company to vacate 800 megahertz of frequencies by June 26 to eliminate interference with public safety radio systems—a blow that could cost the struggling company $3.4 billion.

The most recent woes make Sprint Nextel, which posted a $29.6 billion loss in 2007, more vulnerable than ever to a takeover, analysts say. So it's no surprise that rumors Germany's Deutsche Telekom (DT) is interested in buying the company, which first surfaced in March, are once again back in the headlines. Sprint is worth about $22 billion. Neither company would comment on May 5 about the renewed takeover speculation.

Many Players in Possible Scenarios

The combination of the two carriers would give Deutsche Telekom the No. 1 mobile share in the U.S. in subscriber terms, ahead of both AT&T (T) and Verizon Wireless (VZ) (VOD). Sprint currently has just over 20% of the market, while Deutsche Telekom's T-Mobile USA unit is ranked No. 4, with roughly 11% share. Being swallowed by a larger outfit like Deutsche Telekom is just one of various possible fates that may await Sprint Nextel. All of them promise to reshape the telecom landscape in the U.S.

There is already significant speculation about potential scenarios. Press reports on May 5, for instance, said that talks are once again under way on the potential formation of a new company jointly operated by Sprint Nextel's Xohm division, Seattle startup Clearwire (CLWR), and various U.S. cable companies. The venture would build and run a new nationwide wireless network based on mobile WiMAX technology, an alternative to traditional cellular that is being heavily pushed by Intel (INTC) and other backers.

If Xohm's WiMAX business is hived off, the rest of Sprint Nextel might be purchased by T-Mobile, though the companies' existing mobile networks have very little in common in frequencies and technology. Sprint's network—like that of Verizon Wireless—is based primarily on the CDMA standard promulgated by Qualcomm (QCOM), while T-Mobile's network, like AT&T's, uses the European-developed GSM standard. The two incompatible networks could evolve toward each other if both Sprint Nextel and T-Mobile migrate to a next-generation standard called Long Term Evolution, or LTE. (That's the likely path for Verizon Wireless as well, because outside the U.S., co-owner Vodafone uses mostly GSM and its descendants.)

A Game-Changing Scenario

Although a combined T-Mobile and Sprint Nextel would have the largest number of mobile subscribers, it could still struggle against Verizon and AT&T because they are able to offer so-called quadruple play bundles that include voice, data, TV, and wireless services, which neither Sprint nor T-Mobile currently can.