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Race on to acquire slice of Sprint Nextel

17 июля 2008

The speculation surrounding the future of Sprint Nextel, the struggling, third largest US mobile network operator, reached a crescendo this week after it emerged it could be back in negotiations with SK Telecom, part of Korea’s SK conglomerate.

Both companies have declined to comment and people close to the talks warned that they were still at an early stage and were more likely to lead to SK Telecom, backed by US private equity firms, acquiring an equity stake in Sprint Nextel rather than a full- blown purchase.

“A minority stake more likely than full takeover,” said Jason Armstrong of Goldman Sachs in a note to investors. “We believe at around $45bn in enterprise value, and $25bn in market capitalisation, the size of a potential outright acquisition of Sprint would be problematic given SK Telecom’s smaller size [it has a market capitalisation $15bn].”

An outright purchase would require a sizeable cash component, Mr Armstrong said, an unlikely scenario in current capital market conditions.

Speculation about Sprint Nextel’s future has become rampant since Gary Forsee, the company’s former chief executive and architect of the troubled $36bn acquisition of Nextel Communications by Sprint in 2005, was forced to resign last autumn and the extent of the wireless carrier’s problems became apparent.

Significantly, it is not the first time that SK Telecom, which uses the same CDMA (Code Division Multiple Access) technology as Sprint to power its network, has expressed an interest in Sprint Nextel.

The Korean company, in partnership with Providence Equity, approached Sprint in November with a proposal for an equity infusion of at least $5bn but was rebuffed. That offer was made at a time when Sprint Nextel’s shares were trading at about $15 each, 70 per cent above current levels.

Among other potential suitors, Deutsche Telekom, which already owns T-Mobile USA, the fourth largest US wireless operator, confirmed this year that it had considered making a bid for Sprint Nextel.

Others have speculated that Sprint might spin off its Nextel unit, which uses a different type of wireless technology called iDen.

However, Dan Hesse, who took over as Sprint Nextel’s chief executive at the start of the year, and other senior Sprint managers have played down these rumours, suggesting that unwinding the merger and network integration that has now taken place would be extremely difficult.

In contrast, the purchase of a minority stake in Sprint Nextel by SK Telecom would probably be warmly welcomed by Sprint’s long-suffering investors who have seen the value of their holdings in Sprint decline by almost 40 per cent over the past year.

Such a deal would buy Mr Hesse additional time to fix the US wireless operator’s problems and stem the subscriber defections to AT&T and Verizon Wireless, the US wireless market leaders. Rich Nespola, chief executive of TMNG, a telecoms industry consultancy, said it would provide Sprint with an effective source of capital to assist with their turnaround.

It could also potentially provide both SK Telecom and Sprint Nextel with additional leverage in negotiating infrastructure purchasing contracts – including innovative handsets – with the leading global telecoms equipment suppliers.

Mr Hesse has already taken a series of steps to stabilise the loss-making business, including folding its embryonic 4G operations based on WiMax technology into a joint venture with Clearwire and a group of partners including leading cable television operators, Google and Intel earlier this year.

And while Mr Hesse has warned investors not to expect a fast recovery, there are early indications that Sprint, which had 52.8m customers at the end of the first quarter, has begun to turnaround.

In particular, the recently introduced Samsung Instinct smartphone has proved to be a big hit with customers who have also begun to report an improvement in Sprint Nextel’s marketing activities and customer service. These modest gains are expected to be reflected when Sprint Nextel reports its second-quarter results next month.

For its part, SK Telecom, acknowledged by many to be one of the technically most advanced wireless operators in the world, has been trying to establish a beachhead in the US for some time, although it has suffered a number of setbacks.

“From an SK Telecom perspective, [by buying into Sprint] it establishes a foothold in a large international market as part of the globalisation of wireless communications,” said TMNG’s Mr Nespola.

Most recently, SK Telecom orchestrated the merger of its loss-making Helio joint venture with Earthlink into Virgin Mobile USA.

That deal gave the South Korean group a 17 per cent stake in the combined company and a graceful exit from Helio, a mobile virtual network operator that like Virgin Mobile, relies on network capacity bought from Sprint Nextel.

Источник: Financial Times

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