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For Sprint Nextel, Only Salvation Might Be a Buyout

But would Verizon, AT&T or T-Mobile really want it?

Sprint Nextel's

(S) - Get SentinelOne, Inc. Class A Report

inability to hang on to customers means the teetering telecom giant might have no choice but to hope for a rescue from one of its fiercest rivals.

Given that it's among the top four national wireless carriers in the U.S, it could make strategic sense for a potential bid from

Verizon

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,

AT&T

(T) - Get AT&T Inc. Report

, and

Deutsche Telekom's

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T-Mobile unit. The question is which potential partner is best fit to carry Sprint on its shoulders.

Rumors of a buyout were swirling after

CNBC

contributor Jon Najarian said this week that Sprint had hired Morgan Stanley to explore all potential deals and takeovers. Sprint spokesman James Fisher said it was company policy not to comment on rumors or speculation, and Morgan Stanley also declined to comment.

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Of course, takeover talk is nothing new these days to Sprint. Late in 2007, its board spurned an offer from South Korea's

SK Telecom

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and private-equity firm Providence Equity of a $5 billion investment. That was when shares of Sprint were trading around $15. Since then, the stock has fallen roughly 60% to $6.

Craig Moffett, analyst at Sanford C. Bernstein, isn't convinced. "Despite trading at a 20-year low, Sprint's shares are still not compelling," he wrote in a research report. "Recent focus on pricing and Sprint's poor fourth-quarter results have led even to press speculation about bankruptcy."

Last month, Sprint named activist investor Ralph Whitworth to its board of directors, a move that would indicate there would be some openness to look closely at a bid from a rival.

Credit Suisse analyst Chris Larsen says that SK Telecom could always come back to Sprint with another offer. "SK Telecom is a $20 billion company, and it definitely has an interest in being in the U.S.," he says.

However, a savior is more likely to be found in one of Sprint's three U.S. rivals. Because of antitrust concerns, Larsen is quick to scratch AT&T and Verizon from the list, leaving a partnership between Sprint and T-Mobile as the likeliest possibility.

"T-Mobile uses a different technology in GSM than what Sprint uses, which is CDMA and iDEN," Larsen says. "That would leave a company with three different technologies for its network, in addition to Sprint's development of WiMax."

GSM stands for global system for mobile communications. CDMA is code-division multiple access, and iDEN is integrated digital enhanced network.

Steve Clement, an analyst with Pacific Crest Securities, says that all three rival carriers would need to weigh the cost of an acquisition against the ability to cherry pick customers from Sprint.

"None of these options offers a very clean transaction," Clement adds. "AT&T or Verizon could have a difficult time just because of the size and concentration of spectrum involved. T-Mobile is smaller and makes more sense from an industry standpoint."

Moffett disagress, calling Sprint's two networks "nothing short of a disaster. T-Mobile would be left with not two incompatible networks, but three."

The worst-case scenario would be that, with post-paid subscribers leaving the company in droves and no savior, Sprint could find itself in a terminal situation before it can turn things around. In late February, Sprint said that the number of wireless subscribers dropped by 108,000 in the fourth quarter due to declines in post-paid iDEN users and pre-paid Boost mobile users.

"We are taking the customer defection issue very seriously, and we're addressing it," said Sprint CEO Dan Hesse during the company's fourth-quarter conference call. "Because we have not provided the right experience, customers are leaving us."

The problem feeds upon itself: As the number of subscribers to Sprint's network dwindles, more customers are apt to follow suit. After all, there's no reason for someone to stay with a wireless carrier for free in-network calling if their friends and family all use a rival carrier. If this trend doesn't change, Sprint's subscriber base could be whittled down to nothing.

"Today, people buy wireless phones on certain networks because friends and family are on that network," says Larsen. "As the number goes down, there's less of a reason to stay on the network."

WiMax is yet another type of technology that Sprint hopes to use in order to provide its customer base with fast wireless data transfers over long distances. With WiMax development coming under scrutiny from Whitworth because of its snowballing costs, Sprint has sought to merge the division with

Clearwire

(CLWR)

.

The joint venture received a new life after

Intel

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said it would inject $2 billion into the WiMax formation, and there have been whispers that

Google

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will also help foot the bill.

"Sprint is a difficult situation because they have a wealth of spectrum that is ready to deploy for some sort of broadband technology, but they're not in a position to deploy capital," says Clement. "With Intel and Google and others, it would allow Sprint to retain an option without putting up the capital up."

Of course, Sprint could try to weather the storm. Some analysts say the company's new unlimited data plan is gaining some traction, but Sprint might have to be even more aggressive with a lower price, one that won't come until it feels comfortable its network and customer service can handle it. However, no guarantees can be made that Sprint will be able to stem those customer losses.

Bernstein's Moffett says he believes the prospect for a buyout and the possibility of Sprint declaring bankruptcy remain remote.

"The most likely outcome, given these crosswinds, is neither a complete meltdown nor a convincing recovery, but instead a limp-along future that, well, looks a lot like the limp-along present," he said.

Greg Miller, analyst with Deutsche Bank, argues that no turnaround is in sight. "Downside risks include an acceleration in

subscription losses, slowing economy and a weakening CDMA business," he said in a research note, adding that the only upside risk to the stock is "Sprint being acquired at a premium."