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Sprint and T-Mobile in Talks (Again)

It Just Doesn’t Seem Likely

With AT&T (NYSE:T) and Verizon Wireless (NYSE:VZ) increasingly dominant in the wireless sector, rumors of talks between Sprint (NYSE:S) and Deutsche Telekom regarding a combination of #3 Sprint and #4 T-Mobile USA (and maybe Clearwire (Nasdaq:CLWR) too) have caused a stir before…today the Wall Street Journal and news wire service Bloomberg both reported that the two are back (still?) at the table, though a deal doesn’t appear imminent.

It’s been about eight months since the last time such a combination was the topic of heated speculation, but now, as then, I just can’t see it happening.  The reasons are many, but perhaps most important is the fact that Sprint has just now started to recover from its calamitous Nextel acquisition.  The company managed to grow subscribers in 2010 for the first time in years and ceo Dan Hesse seems to be working his magic to bring Sprint back to growth and (eventually) positive earnings.

Meanwhile, T-Mobile USA just reported its own 2010 results and the headline was a loss of 318k postpaid subscribers in the fourth quarter, for a nearly 400k loss in the year.   Revenue and cash flow held pretty steady, but the company lost about a total of 56,000 customers for the year overall, and many of the new subscribers are less profitable MVNO subs.  So they’re replacing high margin postpaid subs with lower margin prepaid and wholesale customers.  

T-Mobile also has a need for spectrum in order to remain competitive as 4G services proliferate. The company believes its ongoing upgrade to the HSPA+ system will allow it to remain competitive through this year at least, but consumers clearly didn’t buy its holiday season campaign touting “America’s Largest 4G Network.”  

Clearwire, which Sprint owns 54% of, has lots of spectrum and T-Mobile and Clearwire have reportedly been in talks as well.  Alternatively, T-Mobile may opt to resell LightSquared’s LTE service when it launches later this year.

But the bottom line is really one of valuation.  Sprint still has a hefty debt load and when we run a discounted future income model on T-Mobile, based on its recent performance, we can’t get the enterprise value above $20b.  T-Mobile carries its equity alone on the balance sheet at more than $20b and there’s also $15b in debt there…

Not that it couldn’t happen, but there are a lot of moving parts and we’re thinking Sprint probably wants to stick to its own knitting, overhaul its network, clean up its murky relationship with Clearwire and keep moving forward without the added burden of another major combination.

I have to acknowledge, however, that Wall Streeters apparently don't take my Doubting Thomas view.  Shares in Sprint surged as much as 7.4% today before closing up nearly 5% on the "news."  After what happened with Nextel, you'd think investors would be slightly more suspicious of a major transaction.

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