Sprint Nextel Mulls Breakup: Report - TheStreet

Sprint Nextel Mulls Breakup: Report

That report follows earlier speculation that Deutsche Telekom might bid for the company.
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Updated from 10:21 a.m. EDT

Shares of

Sprint Nextel

(S) - Get Report

surged Monday on separate reports it was contemplating the spinoff or sale of its Nextel unit and that

Deutsche Telekom

(DT) - Get Report

was considering a bid for the wireless carrier.

The Wall Street Journal

reported early Monday that a bid for Sprint from Deutsche Telekom was at a preliminary stage and management could walk away before making an offer, according to people close to the situation. Analysts tell

TheStreet.com

that Deutsche Telekom could bid up to $12 a share for Sprint.

Representatives for Sprint and Deutsche Telekom's T-Mobile unit both said it was company policy not to comment on rumors or speculation.

Meanwhile, a separate report from

The Wall Street Journal

surfaced just before the closing bell that Nextel's founder Morgan O'Brien was attempting to field a consortium of investors to bid on Sprint's Nextel unit. Sprint is also reportedly considering spinning off the Nextel unit into a separate company, which would undo the $35 billion acquisition from 2005.

Cramer: How to Buy Telecom

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Sprint was lately up 98 cents, or 12.4%, to $8.87, while Deutsche Telekom was off 0.9% at $17.95. Rival

AT&T

(T) - Get Report

was losing 0.5%, and

Verizon

(VZ) - Get Report

was down 1.5%.

Currently, Deutsche Telekom's T-Mobile unit is the fourth-largest wireless carrier in the U.S., with roughly 28.7 million customers. If Deutsche Telekom were to acquire Sprint, which has a market capitalization of $22 billion and had 53.8 million total subscribers at the end of 2007, it would propel T-Mobile to the top wireless position in the U.S.

A spinoff of the Nextel unit makes some sense, given the rumored Deutsche Telekom bid. Analysts point out the difficulty of merging the three different technologies from the two companies: CDMA from Sprint, iDEN from Nextel and GSM from T-Mobile.

"What they would not do is try to integrate the companies," says Credit Suisse analyst Chris Larsen. "T-Mobile would try to convert those customers on Sprint to GSM. However, they would get much-needed spectrum from Sprint."

Citigroup analyst Michael Rollins agrees that a Deutsche Telekom acquisition of Sprint could be successful if it could grow the GSM platform and shrink the CDMA and iDEN technologies. However, the likelihood of that scenario playing out is less than if a cable multisystem operator or a private-equity company were to acquire Sprint, he believes.

"We previously described that a possible Sprint acquisition by Deutsche Telekom may have opportunities, although we did not believe

it was prepared to make a large investment for its U.S. portfolio," said Rollins in a statement. "We believe Sprint can be an acquisition target, but the problems at Sprint still seem deep-rooted and may deter a buyer in the near-term for the assets given the risks that subscriptions and cash flow may not trough until between 2009 and 2010."

Larsen estimates that Deutsche Telekom could bid $10 or $11 a share for Sprint, while Rollins believes it could go as high as $12 a share for the company.

Rollins said that the risks of regulatory approval remain a large hurdle for current carriers because of the resulting industry concentration around the big four national carriers and the presence of at least one regional carrier in a number of markets.

"Any entity trying to acquire Sprint would need to deal with a number of complex issues around iDEN re-banding and integration, internal customer service hurdles, brand positioning (and continued restructuring), and other operating challenges that may further dilute Sprint's cash flow over the next 1 to 2 years," he said. "Meanwhile, companies currently not in the wireless sector have an option to build a cheaper and better-positioned 4G network platform from the ground-up."

Rumors of a Sprint buyout first surfaced in March after a

CNBC

contributor said Sprint hired Morgan Stanley to explore potential deals and takeovers, although both Sprint and Morgan Stanley declined to comment at the time.

Sprint has struggled with high customer attrition, which the company has blamed on poor customer service. During its fourth-quarter earnings report, Sprint said that the number of wireless subscribers dropped by 108,000 in the quarter due to declines in post-paid iDEN users and prepaid Boost mobile users. Total post-paid subscribers, a favorite metric among analysts, declined by 683,000.

"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."

Sprint will deliver first-quarter results on May 12, with analysts expecting a profit of 2 cents a share on revenue of $9.40 billion, according to Thomson Reuters. However, net subscriber adds (or declines) will undoubtedly receive more attention from analysts and Deutsche Telekom.

The possibility of a buyout also brings up questions over Sprint's long-rumored merger of its WiMax division with

Clearwire

(CLWR)

. In March, Clearwire said it has been active in talks to hammer out an agreement with Sprint for a deal that would create a new company that combines Sprint's licenses in the 2.5-gigahertz wireless spectrum and Clearwire's spectrum in the same and adjoining air waves.

The following month, Sprint said the commercial launch of the high-speed WiMax network had been postponed, leading to questions about the company's ability to fund the technology. However,

Comcast

(CMCSA) - Get Report

and

Time Warner

(TWX)

were said to be considering offering their backing.

Intel

(INTC) - Get Report

has indicated it's interested, and

Google

(GOOG) - Get Report

is believed to be thinking about participating in the project.