Despite VoiceStream Talk, Sprint's Still No. 1 for Deutsche Telekom

A VoiceStream buy would satisfy the German telco's hunger for a U.S. wireless presence.
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In talking with wireless operator

VoiceStream

(VSTR)

,

Deutsche Telekom

(DT) - Get Report

is shoring up a Plan B should its preferred target,

Sprint

(FON)

, escape the German telco's clutches.

Wired About Wireless

VoiceStream-DT Talk Sets Up a Bidding War

Analysts say Sprint, whose $115 billion merger with

WorldCom

(WCOM)

appears to be dead following regulatory objections, remains DT's intended target. But industry observers predict that DT's talks with VoiceStream will provoke a heated bidding war for that property among as many as four or five big players. And with nationalistic impulses in the legislature stirring some uncertainty over prospects for a DT-Sprint union, analysts agree that a VoiceStream plan makes good sense.

Sensing that the consolidation sweeping the telecom industry is about to enter another hectic cycle, investors Tuesday bid up the shares of companies seen as takeover targets and dumped those of potential buyers. Among targets, VoiceStream jumped 12% to 139,

Nextel

(NXTL)

added 3.4% to 66 5/16 and Sprint's

Sprint PCS

(PCS)

added 2.4% to 60 1/2. Would-be buyers include DT, off 2.5% to 57,

France Telecom

(FTE)

, off 5% to 139 3/4, and WorldCom, off 1.4% at 44 11/16.

Under Pressure

"Deutsche Telekom is under pressure to make some acquisitions here," says Jennifer Murtaugh, a wireless analyst with

First Union Securities

who has a strong buy on VoiceStream and no ratings on Sprint or Deutsche Telekom. "If the Sprint deal doesn't go through, VoiceStream makes for a way to get a wireless entry into the U.S." First Union hasn't done banking for these companies.

A Deutsche Telekom spokesman, while declining to comment on news reports or talks with U.S. companies, outlined the German telco's U.S. objectives: to acquire an Internet backbone, a wireless operation, a business-services unit and an Internet service provider. "We have not put company names on any of these four pillars," the Deutsche Telekom spokesman said. Sprint and VoiceStream were not immediately available for comment.

VoiceStream would certainly answer the wireless question, and even an informal bid for the company would probably set off a bidding war among rivals that see this as their last chance to build a nationwide wireless network, says Murtaugh. She likens the scrum to the hotly contested bidding for

AirTouch between

Bell Atlantic

, now part of

Verizon

(VZ) - Get Report

, and

Vodafone

(VOD) - Get Report

.

"I wouldn't be surprised to see people coming out of the closets with an interest in VoiceStream," says Murtaugh. Deutsche Telekom's interest "might be the opportunity to get them going." Other possible bidders would include France Telecom, WorldCom and

SBC

(SBC)

, she says.

Technical Issues

While it's clear the big telcos want a wireless presence and their options are growing limited, not everyone buys the notion that a no-holds-barred bidding war is a certainty. "There's definitely a chance of a bidding war for VoiceStream, but Sprint mitigates the likelihood of that somewhat," says Art Poole, a wireless analyst with

Raymond James

, who adds that France Telecom,

NTT DoCoMo

and others have the financial wherewithal to buy Sprint. Poole has a strong buy rating on VoiceStream, no ratings on other companies mentioned in this article and no underwriting ties with any of these companies. France Telecom and WorldCom didn't immediately return calls seeking comment, and NTT wasn't immediately available.

Hanging over any plans Deutsche Telekom may have is the 58% stake in the company held by the German government. At least 30 U.S. senators have indicated they would

oppose selling a vital U.S. telecom asset, such as Sprint, to a company owned mostly by a foreign government.

Deutsche Telekom has had ongoing discussions with U.S. regulatory officials, according to a company spokesman who wouldn't elaborate on the nature of those talks. Industry observers say the talks are most likely centered on the German government's stake and may involve a schedule to reduce that to a more acceptable 25% total holding.