Where Does the AT&T and T-Mobile Deal Leave Sprint Nextel?

Sprint Nextel (S) shares battled back Tuesday after being pummeled by AT&T's surprise $39 billion T-Mobile merger announcement the day before.

While the nation's No. 3 carrier doesn't have a sexy merger or acquisition to announce right now, Credit Suisse analysts on Tuesday noted that a network-sharing deal with LightSquared may be coming soon, potentially adding an additional 50 cents to $1 to Sprint's stock value. Sprint shares rose 2.46% to close at $4.47 Tuesday, swimming against the broader markets' red tide.

LightSquared, a wholesale company that sells spectrum to customers to increase their network capacity, relies on other carriers' base stations to build out its virtual network. A Sprint deal would likely involve LightSquared paying the carrier to use its base stations, then piggybacking on the Sprint network to provide spectrum to LightSquared customers, says Credit Suisse analyst Nick Karzon.

Could Merger Benefit Sprint?

Jonathan Atkin, an RBC Capital Markets analyst, says that Sprint may even see some benefits from AT&T's (T) T-Mobile acquisition. He noted that the pending merger could take out Sprint's chief rival in the pre-paid market, No. 4 carrier T-Mobile. The company will likely be distracted from this market, in which customers pay in advance for their cell-phone use instead of signing up for a monthly subscription, as it integrates into AT&T -- currently the U.S.'s No. 2 carrier -- once shareholders and regulators sign off on the deal.

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The merger also could give Sprint's 4G network a boost, Atkin says."This will probably accelerate Sprint's 4G strategy, like whether they want to partner or have a strategic relationship with Clearwire and LightSquared. It'll sharpen their focus," he noted.

Sprint is building out its next-generation 4G network, which aims to deliver faster speeds -- but will also increase the need for greater capacity to handle more data as more folks download videos and linger on the Internet with their smartphones. The carrier holds a 54% stake in Clearwire, which is expected to operate Sprint's network, but the companies have tussled over the terms of that relationship.

Downsides of the Merger for Sprint

But the AT&T and T-Mobile merger also has some downsides for Sprint. For one thing, it could make Sprint's Clearwire relationship more expensive. That's because it's unlikely that T-Mobile will now partner with Clearwire to build a WiMax network when AT&T uses a competing 4G technology, LTE.

"Sprint will now be left having to fund Clearwire on its own, with future development costs likely falling in a multi-billion dollar range," Bernstein Research analyst Craig Moffett wrote in a research note Monday. "Despite the difficult network economies posed by Clearwire's 2.5 GHz spectrum, it is still in Sprint's interest to see Clearwire succeed, given the size of its investment. A deal with T-Mobile would clearly have offset this burden in part."

Earlier this month, before AT&T swooped in, industry watchers had been expecting a merger between Sprint and T-Mobile. News of the disappointment led some analysts to downgrade the stock. "[Sprint] will likely fall short of subscriber expectations for 2011, and that its prospects as a standalone player are dim," says Moffett, who downgraded Sprint to "underperform" from "market perform" and knocked down Sprint's price target to $3 a share from $5.

Long-Term Expectations

Others, including Brett Feldman with Deutsche Bank and Christopher Larsen with Piper Jaffray, also weigh in with dour expectations for Sprint. In a research note, Larsen says he expects to see AT&T 's subscriber base and market share grow as a result of the merger. In another note, Feldman adds: "Now, with the AT&T / T-Mobile deal, Sprint will likely remain in a distant #3 position, even if it were to acquire all remaining regional and emerging carriers."

Meanwhile, Dan Mead, the CEO of No. 1 carrier Verizon Wireless, put the kibosh on the notion that it would be interested in acquiring Sprint to retain its rank in the U.S. market. If the merger goes through, AT&T would leapfrog over Verizon for the most U.S. subscribers. Mead said he would consider looking at smaller deals, according to The Wall Street Journal.

Nonetheless, Feldman reiterated his "buy" recommendation for Sprint and $7 price target. The company could benefit in the long run as the industry consolidates and remaining players get a larger slice of the market, he says. He adds: "We therefore recommend that investor buy Sprint on any near-term pullback."