Sprint and T-Mobile USA in Merger Talks?

Deutsche Telekom AG has held talks to sell its T-Mobile USA unit to Sprint Nextel Corp. in exchange for a major stake in the combined entity, Bloomberg said. “In general, all options are open in the U.S. -- the sale of the whole business or of parts,” Deutsche Telekom Chief Financial Officer Timotheus Hoettges said read more

Talks have been on and off, and a deal may not be reached, sources suggest. Such rumors have floated before, and observers have noted the high risk of integration, with any new entity operating multiple different networks (GSM, CDMA, iDEN, WiMAX). Of course, Sprint has said it will shut off the iDEN network, and almost certainly will light a new Long Term Evolution network. Granted, it is typical for any major carrier to support at least two networks concurrently. Supporting four networks would be quite challenging, in terms of gaining scale economies from any merger of T-Mobile USA and Sprint. read more.

On the other hand, the reason such rumors or talks have happened is that the U.S. mobile market arguably has too many contestants for a stable market structure. Indeed, there are two schools of thought on a potential merger between Sprint Nextel and T-Mobile USA.

On the one hand, notes Bernstein Research analyst Craig Moffett, the U.S. wireless market is “crying out for consolidation.” In most local markets, there are as many as seven different price actors, Moffett said. Most observers say that amount of competition in a capital-intensive business such as mobility is not stable over the long term. A merger would create three major facilities-based providers, allowing the new entity to compete more evenly with AT&T and Verizon Wireless.

But among the big issues are the chores of integrating incompatible networking technologies, since over the long term it will be difficult to obtain operating economies without reducing the number of supported protocols. read more.

The rumored talks might not lead to an actual deal. Citigroup analyst Michael Rollins reportedly estimates the odds of a deal as being under 30 percent. He also cites the significant integration risk; and he says there is only a 50 percent to 60 percent chance that regulators would approve such a combination. Some might well note that, historically, mergers between weaker partners often fail, over the long term, to close a gap with a market leader. Sometimes, the result is simply a larger, but still weaker contestant unable to close the gap with a market leader.

Still, the current market structure likely will remain unstable for both Sprint and T-Mobile USA so long as both remain independent entities. The market share gap between either of the firms and AT&T and Verizon Wireless is substantial and consequential. There is a reason neither Sprint nor T-Mobile USA have rights to sell the Apple iPhone or iPad. So long as AT&T and Verizon have something on the order of 30 percent to 33 percent share, the other two contestants, with shares in the 11 percent to nine percent range, will face hurdles.