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LONDON (CBS.MW) -- German-owned T-Mobile could be the loser in the latest U.S. wireless telecom shake-out, analysts said Wednesday, while Verizon Communications and partner Vodafone Group will remain strong and could still surprise with an offer for Sprint.
One German analyst who watches U.S. telecom companies even predicted that Verizon , backed by Vodafone , would challenge Wednesday's agreed merger between Sprint Corp. and Nextel Communications with a bid of up to $45 billion for Sprint. He said Verizon and Sprint have "remarkable synergies."
"T-Mobile USA will become the distant fourth player in the U.S. mobile market," said Dan Bieler, research director at London-based technology and telecom market researcher Ovum. He added that the Sprint-Nextel deal would affect the Deutsche Telekom unit much more than Vodafone, which has a 45 percent stake in the No. 2 U.S. player Verizon Wireless.
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"Vodafone should remain largely unaffected by the deal. T-Mobile, meanwhile, now has a subscriber market share of merely 12 percent, compared to 34 percent for Cingular, 31 percent for Verizon Wireless and 23 percent for Sprint-Nextel," he said.
He also said T-Mobile was not as cash-generative as its larger competitors, and appeared to be spending more to win new customers.
"There are clear indications that scale is becoming an increasingly pressing issue for T-Mobile USA. T-Mobile USA has attracted 3.2 million net [subscriber] adds -- more than any other U.S. operator [this year] apart from Verizon Wireless. However, looking at cash generation, the picture looks much less impressive."
Bieler said that T-Mobile's share of operating free cash flow in the year-to-date amounted to 5 percent -- compared to its subscriber market share of 12 percent.
"We fear that Deutsche Telekom will find it hard to push T-Mobile USA to the efficiency levels of its peers," he said.
Sprint-Nextel offered cash efficiency of 20 percent in the year-to-date compared with 8 percent for T-Mobile USA, he said.
"Deutsche Telekom looks like having to spend more for every dollar earned in cash than its North American wireless peers," Bieler said.
Frank Rothauge, telecom analyst at Oppenheim Research in Frankfurt, said: "I believe it will get tougher for them."
He said that in the short-term, T-Mobile USA could actually gain a few more subscribers while Sprint and Nextel are occupied by their planned merger.
But in the medium term, he said, the merger could lead to a difficult, more competitive environment for T-Mobile.
"In the past, in markets with three or more competitors who are equally strong (which would be the case in the U.S. if Sprint and Nextel merge), those markets were most competitive.
"Clearly this is not in the interest of T-Mobile because they would be the smaller one with three larger ones competing strongly with each other. This could have a negative impact on profitability and on its ability to gain additional subscribers."
He said there were advantages in being owned by the large Deutsche Telekom -- for example being able to buy equipment cheaply -- but these were things that T-Mobile USA had already exploited fully. This is why it had been able to be rather successful despite being very small (in the U.S. market), he said.
Some commentators have said that T-Mobile, along with Verizon and Cingular, can all expand by buying spectrum in federal airwave auctions in the next two years. Deutsche Telekom has set aside $2 billion for such an expansion next year.
Verizon Wireless, one observer pointed out, has been gaining 1.7 million subscribers per quarter, which could mean it reclaims its No. 1 slot from Cingular without an acquisition.
But Rothauge said Verizon Communications may well still bid to take over Sprint.
He said he believes an offer could emerge before Christmas for up to $45 billion.
Verizon had been rumored to bid for Sprint but Vodafone denied it was in talks with its U.S. partner to support such an offer and analysts widely downplayed the likelihood of a deal late Tuesday.
Sprint has far greater synergies with Verizon than it does with Nextel, including use of the same network technology, Rothauge said.
If an offer came it would be for Sprint without Nextel but with Sprint's local telephone business, which it would integrate with the Verizon Communications long-distance fixed-line business -- one of the "remarkable" synergies that he sees.
The mobile part of the business would be integrated with Verizon Wireless.
"I imagine Verizon is thinking about bidding for Sprint. I can well imagine that a bidding war comes up now," he told CBS MarketWatch in a phone interview.
"Mainly it's the Nextel shareholders that benefit (from the merger announced on Wednesday), not so much the Sprint shareholders."
JP Morgan said a Verizon bid would also be attractive to Vodafone shareholders but it added that there could be significant regulatory objections to such a move.
He said he would not rule out a $45 billion bid, which would represent a premium of more than 20 percent.
"There may be a counter offer before Christmas."
Rothauge said he believed Vodafone would join Verizon in such a bid because it would give the British company the possibility of negotiating a better position in its U.S. investment.
"The problem there is that Verizon really decides on the strategy and the dividend. So Vodafone has an asset that is more or less financial and you don't really even get money out of it. So I don't believe Vodafone can negotiate a majority stake but it can negotiate a better dividend scheme and maybe take over Verizon's stake in Vodafone Italy. Those would be two strategic directives worth investing in."
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Member Comments
I certainly wouldn't go on record suggesting a $45B merger of Sprint/Verizon as a response to a second tier deal with Nextel (as "one German analyst" stated). Sure Verizon and Sprint both use CDMA in the US, but given the Verizon/Vodafone partnership (Vodafone with GSM), it's apparent that technology standards aren't the driving force behind alliances.
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