Skip to main content

Speculation Swirls Around Sprint

Unconfirmed rumors focus on a would-be MCI deal, but not everyone is a believer.

Spring is in bloom and merger buzz is in the air. But not everyone has caught the fever.

The ever-present hum of deal rumors has gotten louder this week as investors -- free at last of quarterly earnings reports -- ponder the pairing possibilities in telecom. Foremost among the most-discussed dream matchups is





, say analysts and investors.

The source of this gust of speculation is no mystery. After all, recent weeks have brought fresh reports of a still-brutal price war in an overcrowded services market. Consolidation only makes sense for the struggling players, investors say.

Of course, while some industry watchers say that while Wall Street would welcome a deal, there's little evidence to suggest that anything is imminent.

Try telling that to investors attending the J.P. Morgan Tech and Telecom Conference in San Francisco this week, though. Some money managers there say merger-and-acquisition "body language" was everywhere. Some report hearing words of glowing praise for MCI's business from a Sprint executive, perhaps suggesting that some synergies could be explored.

And even skeptics say they can see reasonable economic arguments for some acquisitions, assuming the industry isn't still in a tailspin.

For instance, take MCI, which is trading on the pink sheets and is expected to list on the


next week. The Ashburn, Va., phone shop has a market cap of $4.25 billion. The company has an estimated net cash pile of somewhere between $1 billion to $3.5 billion. Doing some back-of-the-envelope math suggests that MCI's phone-and-data business could be valued at as little as $750 million.

The travails of the telecom business are well-known, what with ever-falling prices and customers ready to pack up and change carriers on short notice. Even so, it's easy to see where some fans would argue that a billion dollars or so is cheap for a business with $21 billion in annual sales.

That's especially the case if, as some observers insist, calling prices have begun to stabilize. On that front, one hedge fund manager says that last week might have marked a bottom in terms of negative reports about industry pricing, after

Scroll to Continue

TheStreet Recommends

Level 3



Time Warner Telecom


each gave disappointing business outlooks. The hedge fund manager, who is long Sprint and MCI, is betting that the next mention of pricing will be that it has stabilized.

But others have less faith.

"That could be a great call, but I don't see any signposts showing it, and personally, I'd rather see stability than try to call it," says independent telecom strategist Marty Hyman.

"We've seen deteriorating price pressure, commoditization and other attacks on long distance" such as wireless and cable companies entering the fray, says Hyman. "No one seems willing to double down on this as growth business," says Hyman, referring to the merger climate.

Still, the speculation hasn't stopped, especially around Sprint.

With its smaller scale and wide focus on all aspects of services, such as local, long distance, businesses, consumers and wireless, Sprint is the most versatile operator -- and therefore the most likely candidate for a deal. With MCI's vast network, Sprint could easily rival


(T) - Get AT&T Inc. Report

for breadth of service. Similarly, Sprint could prove to be an excellent fit for


(VZ) - Get Verizon Communications Inc. Report

long-distance, businesses services and wireless ambitions.

Sprint declined to comment. CEO Gary Forsee has said that Sprint's business approach has relied on partnerships more than on mergers. MCI did not return a call seeking comment.

So, if spring breezes by without a big telecom merger, investors can always look ahead to the sultry speculations of summer.