AT&T Takes a Leap at Sprint Threat

NEW YORK ( TheStreet) -- AT&T ( T) is facing a huge threat from Sprint ( S), and AT&T is taking it as seriously as a heart attack.

Sprint, now under the control of SoftBank's Masayoshi Son, has a plan to expand capacity and come at AT&T's wireless market share aggressively.

SoftBank has successfully executed this plan in Japan, where it now leads in market share over NTT DoCoMo and KDDI, that country's versions of AT&T and Verizon ( MSFT), as BGR.Com explained last year.

If Sprint makes the U.S. market's duo a trio, it will be disastrous for AT&T. The company today gets more than half of its revenue from its wireless unit; thus that unit's market share is critical in its stock valuation. Right now, AT&T is worth 10 times more than Sprint, so as Sprint gains share you would expect that gap to narrow.

AT&T's response to the threat is to try and buy up the rest of the wireless board, creating an oligopoly in hopes of reducing Sprint's ability to compete. This has begun with the purchase of Leap Wireless ( LEAP), known for its Cricket brand of prepaid wireless plans, for $1.19 billion. The deal was announced Friday.

As our Antoine Gara noted in writing about the Leap deal, all this is making hedge fund manager John Paulson billions of dollars. Paulson took shares in Sprint, Leap and MetroPCS ( PCS) when they were being priced for bankruptcy, and he's cashing in on the consolidation.

With the Department of Justice having started this acquisition game by halting AT&T's plan to buy T-Mobile US ( TMUS) two years ago, AT&T's ability to squeeze out Sprint is thus limited. One way to get around the block, analyst Jeff Kagan tweets, is to take out small players such as Leap for their spectrum.

Another way to get around it is by using the spectrum it's acquiring to deliver new services the Federal Communications Commission loves. Thus, AT&T has been teasing an event for tomorrow that Hot Hardware speculates could mean the rollout of a faster LTE-Advanced network created by combining radio channels for faster speeds.

An LTE-Advanced service, based on bigger hunks of spectrum, helps justify consolidation within the space, limiting the number of carriers spectrum can support. AT&T's plan is thus to reduce competition among carriers, which will maintain prices, then match Sprint's network improvements and prices when they appear.

That will take capital, and having spent nearly one-third of its cash on Leap, it's an open question where that cash will come from.

The Daniels Report wrote in April that AT&T's finances are already stretched thin, with the wireline business declining, wireless gains unable to offset those losses, free cash flow dwindling and its defined pension plan a "ticking time bomb."

The price of meeting Masayoshi Son's ambition, Daniels concludes, may in the end be AT&T's pensions and dividends.

At the time of publication, the author owned no shares in companies mentioned here.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

Dana Blankenhorn has been a business journalist since 1978, and a tech reporter since 1982. His specialty has been getting to the future ahead of the crowd, then leaving before success arrived. That meant covering the Internet in 1985, e-commerce in 1994, the Internet of Things in 2005, open source in 2005 and, since 2010, renewable energy. He has written for every medium from newspapers and magazines to Web sites, from books to blogs. He still seeks tomorrow from his Craftsman home in Atlanta.

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