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iPhone Causes Sprint Deal Hang-Ups (Update 1)

Updated with analyst earnings estimates and afternoon share prices.

NEW YORK ( TheStreet) -- Apple (AAPL - Get Report) may be taking a bite out of Sprint's (S) acquisition ability as the nation's third largest carrier tries to digest a spectrum partnership with Clearwire (CLWR) and hunt for deals to grow its subscribers.

In October Sprint announced a $15.5 billion four year deal to carry the iPhone and keep pace with its larger competitors AT&T (T - Get Report) and Verizon (VZ). That deal -- and a commitment to improving smartphone services through a program called "Network Vision" and a multi-billion dollar 4G build with Clearwire -- may be the reason that Sprint's board reportedly iced a $7.3 billion acquisition of MetroPCS (PCS).

Sprint Chief Executive Dan Hesse was "hours away" from announcing a deal to buy MetroPCS until the board vetoed the acquisition last Wednesday, according to Friday reports by CNBC. Analysts now say that while an acquisition of MetroPCS and its pre-paid cellular service competitor Leap Wireless (LEAP) are likely in the user and service growth starved wireless industry, Sprint's expensive commitment to Apple and Clearwire made a deal untenable in the near-term.

Sprint's inability to cut a deal, taken with weaker than expected fourth quarter industry profitability may signal that wireless carriers are struggling to find returns on surging iPhone sales, which drove record quarterly profit at Apple. The Sprint deal also may highlight new reasons why failed consolidation is a possible industry game changer, even as analysts and investors expect 2012 deals.

"As the failure of this transaction makes clear, Sprint's ability to play the consolidator role is highly uncertain, at least any time soon," writes Craig Moffett of Bernstein Research in a Monday note reacting to the failed Sprint and MetroPCS tie-up. That's because Sprint may need billions to invest in its Clearwire 4G service build, while the company paid a hefty price to carry the iPhone. "[They] are burdened with a gigantic and seemingly uneconomic Apple contract that has already depressed margins and that is likely to continue to do so for years," adds Moffett, who has a "market weight" rating on Sprint and an "overweight" rating on MetroPCS shares, with $2.50 and $13.00 price targets, respectively.

Still, according to analyst price targets Sprint and Clearwire are two wireless plays with high risk and reward on their success of a now closer-tethered spectrum partnership.

Sprint and Clearwire shares rose in Monday afternoon trading to $2.56 and $2.15, respectively. Sprint shares are up roughly 10% year-to-date but have dropped over 40% in the last 12 months, while Clearwire shares have posted a similar 2012 gain to go with a near 60% stock drop in the last 12 months.

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That drop in valuation may make the companies positioned for 2012 gains, if closer ties help the wireless partners achieve analyst price targets. Sprint warrants a $3.18 price target and Clearwire shares are valued at $3.33 a share, according to consensus analyst estimates compiled by Bloomberg.

Those expectations of an over 25% possible gain contrast to more established, high dividend paying industry players like Verizon and AT&T, who's stock's trade in-line with analyst price targets. Meanwhile, Leap Wireless shares jumped over 5% to $11.23 -- past analyst price targets of $10.67 - on news of the MetroPCS deal fail.

Still, Sprint's deal fail and recent Clearwire struggles expose huge risks for both companies, as the industry faces profitability threats. Both Sprint and Clearwire reported big 2011 losses, capping a string of unprofitable years that isn't expected to end anytime soon.

Sprint's revenue is expected grow over 4% to $35.1 billion in 2012 as its annual loss narrows from nearly $3 billion to $934 million, according to consensus estimates of analysts polled by Bloomberg. That loss is expected grow back to near $3 billion in 2013, even as sales continue to grow. Meanwhile, Clearwire is expected to lose roughly $500 million in 2012 and 2013, according to analyst estimates.

Before reports surfaced that a $7.3 billion deal for MetroPCS consisting of $5 billion in Sprint stock and $2.3 billion in debt had fallen apart after months of negotiation, Sprint faced the prospect of additional funding for Clearwire that may grow its $20 billion-plus debt stock.
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