Report: Deutsche Telekom evaluating a play for Sprint

The Telegraph newspaper out of Britain is reporting over the weekend that Deutsche Telekom has hired Deutsche Bank to evaluate a possible acquisition of Sprint Nextel Corporation.

This report presents a fascinating set of cross-currents between the likely public discussion of such a prospective deal and the actual enterprise impacts as we see them.

We could see lots of press reports analyzing how Deutsche Telekom pulling together T-Mobile (its currently owned subsidiary) with Sprint and Nextel would create a mobile voice/data behemoth. And of course, a DT-Sprint merger would accomplish that from a corporate standpoint.

But from an operational standpoint, it's actually not obvious where there are immediate synergies. T-Mobile (GSM), Sprint (CDMA), and Nextel (iDEN) operate on three different wireless protocols. Long rumors of a possible merger between Vodafone and Verizon Wireless (who already share an ownership interest) have foundered on the fact that they mix GSM and CDMA user bases. And the Sprint/Nextel merger itself has had enough problems dealing with two protocols. Three protocols in one shop doesn't necessarily buy corporate users anything in the immediate term.

On the other hand, we may see few press reports about a DT-Sprint merger impact on wireline enterprise networks. But in our view at TC2, that's where the real story might be found.

Sprint, through its almost exclusive management focus on the wireless business, has been running the risk of ultimate irrelevancy in the enterprise market -- where for so many years it was an important player in corporate data networks, long distance, and call center services. But DT has a strong motive to reverse this trend at Sprint.

Right now, when multinational corporations, especially those based in the U.S., put out a global RFP, they tend to solicit bids from a "Global Big Four" -- AT&T, Verizon, BT, and Orange Business Services out of France. Deutsche Telekom has long been known to covet a place at this multinational RFP table, and one reason it hasn't been there is that a long-ago loose alliance with Sprint fell apart and its assets, and customers, scattered to the winds.

But owning Sprint outright would reconnect this channel in a firm way, give DT by far the best remaining U.S. corporate user base that's available (while it still exists at Sprint), and combine important assets globally.

We have long said that Sprint is likely to be sold in one piece or in parts, and that it may actually be best if such a deal takes place soon, and involves someone (like DT) that actually knows something about Sprint's history and user base in frame/ATM, MPLS, IP networking in general, and basic long distance outbound and inbound platforms.

That sort of deal is likely to have a far different complexion than if either a private equity firm, or a foreign state-owned venture capital arm (as we see in some Asian countries) comes in to buy Sprint with little or no history invested in America's No. 3 carrier.

Now, this is only the first step. For Germany's biggest telecom carrier to hire Germany's biggest bank to evaluate the acquisition of a company with whom it had a prior alliance is not terribly surprising, and doesn't pre-suppose a final result. Deutsche Bank would have to evaluate all of the above factors -- and then figure out how to make the deal pay off, given the fact that Sprint has a greater debt load than its entire stock market valuation. That means that DT (or anyone) would have to pay more than twice Sprint's actual equity valuation to pull off the deal, although as we have also said before, we believe that factor is already discounted into Sprint's stock price.

But there's no question that the global mergers and acquisitions field is opening back up, and that DT has a lot of energy and motivation for deals -- witness its just-signed joint venture with Orange UK for its T-Mobile UK mobile operations. It may be time for this sort of activity.

Other players may even come in for a play on Sprint. But our focus in following this will be on the impact on enterprises, because the name of the buyer -- and the method (full acquisition, piece-parting, or joint venture)-- will have a huge difference on the Sprint Nextel customer base in all its forms.