If the AT&T Merger Is Doomed, What Then?
The Department of Justice's lawsuit last month to haltAT&T's (NYS: T) $39 billion acquisition of T-Mobile has given Sprint Nextel (NYS: S) some hope in its fight to stay alive. So Sprint has started throwing its own legal weight around and also sued AT&T to stop the deal.
Sprint's lawsuit echoes the fear that the proposed deal would create a duopoly whereby AT&T and Verizon (NYS: VZ) would control 90% of the wireless market's profit. Indeed, it would thrust AT&T into the lead in numbers of subscribers, ahead of archrival Verizon.
Clawing its way back up
Of the four major national carriers, in terms of subscribers, Sprint is a distant third just ahead of T-Mobile. If T-Mobile were swallowed by AT&T, that would leave Sprint hard-pressed to continue its attempts to return to profitability from an even more distant position. In its fight to survive, it has been aggressively offering better pricing deals than the competition, and it has had more liberal handset-replacement policies.
This has worked -- to a degree. Sprint has seen accelerating growth in its postpaid subscriber rolls but is still losing net customers, though at a slower pace. On the other hand, its pricing and handset policies have contributed to lower margins -- not a good sign.
A lose-lose situation
If the DOJ prevails and the merger is stopped, there are termination fees AT&T must pay to Deutsche Telecom, the German owner of T-Mobile. Those amount to $3 billion in cash and another $3 billion worth of its wireless spectrum and roaming agreements given to T-Mobile. This would certainly help out T-Mobile, which has been losing subscribers since the merger proposal was made. Apparently those were customers who didn't want to move to AT&T.
But there are two outs for AT&T: If the deal is not approved within a certain time period, it may not have to pay the termination fee. That also may apply if T-Mobile's value falls below a predetermined level. Obviously, the more subscribers T-Mobile loses, the lower its value.
It ain't over till it's over
In the meantime, Sprint has some things it must do to really get back in the game. For one, it will have to clarify what it's going to do about its 4G dilemma. It currently owns 53% of WiMaX network provider Clearwire (NAS: CLWR) , but that technology is not on par with the networks of AT&T and Verizon.
To remedy that, Sprint agreed to a 15-year agreement with LightSquared's LTE network. But because nothing is ever simple in telecom, LightSquared is embroiled in a controversy with the Federal Communications Commission, which is concerned that its network could affect GPS systems.
Next, Sprint has to continue phasing out its legacy Nextel network. It has had problems integrating the two standards since the acquisition of Nextel back in 2005. Only 15% of Sprint's customers now use Nextel, down from 25% two years ago.
But it seems to always come down to Apple's (NAS: AAPL) iPhone. TheWall Street Journal reported that Sprint will be getting the iPhone 5 in October. If true, this could be a life preserver for the company, especially if it bucks the current AT&T and Verizon practice of limiting data usage .
Take this away ... or don't
Things are really up in the air in telecom-land. The AT&T-T-Mobile merger may or may not happen. AT&T may or may not have to pay termination fees if the merger doesn't go through. Sprint may or may not keep using ClearWire's 4G network. LightSquared may or may not get clearance to use its spectrum.
And Sprint may or may not be able to say it is getting the iPhone at its "Strategy Update" event on Oct. 7. But if it can make that announcement -- and clarify its 4G situation -- and if a stake is driven into the heart of the AT&T merger, well then, it may not be so naive to talk about a real Sprint comeback.
Put the companies mentioned here on your Watchlist.
At the time this article was published Fool contributorDan Radovskyowns shares of AT&T. The Motley Fool owns shares of Apple.Motley Fool newsletter serviceshave recommended buying shares of AT&T and Apple and creating a bull call spread position in Apple. Try any of our Foolish newsletter servicesfree for 30 days. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.
Copyright © 1995 - 2011 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.