Sprint Losing Steam in Merger Marathon

Sprint's (FON Quote) race to sell itself now looks more like a marathon, raising questions about its value over a long haul.

On Tuesday, the other pin dropped for the nation's No. 3 long-distance company, as Sprint and WorldCom (WCOM Quote) called off their $115 billion merger. That followed the Justice Department's confirmation that it would sue to block the deal. (TheStreet.com broke the news on the Justice Department's pending move last week.)

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So Sprint goes it alone, at least for now, and analysts say much has changed since the merger plan was hatched last year. With the long-distance business in a faster-than-expected decline, and the attendant defections of customers and talent in the wake of the merger uncertainty, Sprint just ain't what it used to be.

In addition, if no other bidder steps in, Sprint's share price most likely will lose the takeover premium that helped it rise 10% over the past year. During that same period, as it's become clear that consumer long distance was a declining business, WorldCom shares have fallen 39% and AT&T (T Quote) has lost 40% of its value.

Sprint shares have been moving sideways for the last few days as investors waited for a sign of a merger decision from the companies and the Justice Department. By midday Tuesday, the shares were down 2 3/16 at 57 3/8.

Time to Bail?

"If I held Sprint right now, I'd be selling it," says Joel Fishbein, a telecom analyst and fund manager at Gardner Lewis Asset Management, which does hold WorldCom. "It's just not worth now what it once was, given how long distance has deteriorated."

The multibillion dollar question weighing on Sprint is whether it can fetch a high enough purchase price to justify the premium that the WorldCom merger gave it. There has been a steady hum of speculation that Deutsche Telekom (DT Quote) or other international phone companies would be interested in Sprint.

"This could be a painful wait. And I don't know if that is a good investment case to hold the stock, especially if the company's fundamentals aren't improving," says Bill Klein, an analyst at Wasserstein Perella, which has no banking ties to any of these companies.

"I can't imagine someone like a Deutsche Telekom would be willing to overpay for Sprint at this point," Klein adds. "WorldCom came in at a time when Sprint's was a growing business. Since that time, through no fault of Sprint's own, the business has dropped off."

Valuable Assets

Still, Sprint controls the nation's fastest growing wireless operation, Sprint PCS (PCS Quote), and has an enviable Internet backbone that, together, may help offset the weak long-distance business. And compared to WorldCom, which has been considerably lax in integrating its mishmash of acquired networks, Sprint has made its network a priority, says Lisa Pierce, an analyst with Giga Information Group.

"They have a built-in redundancy that WorldCom just doesn't have. Generally speaking, their network quality is superior," says Pierce, who consults to most of the major telecom companies.

But industry observers say Sprint lacks the assets to go it alone and has demonstrated that it needs to partner with another large, presumably international telco to forge ahead. With that premise, investors shouldn't subtract the takeout value from Sprint, contends Michael Eggly, co-manager of Northern Global Communications Fund. Eggly's fund holds no Sprint but does have positions in Sprint PCS and WorldCom.

"I think the stock will hold its value as people wait for another takeover," says Eggly. "If it appears one is not imminent it could trade lower."

But with a premium already built in, says Eggly, the upside will be limited.

And if Sprint shareholders don't begin to see signs of a finish line, they may pull out of the race.