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Sprint Plunges After AT&T’s T-Mobile Deal Is Seen Leaving It Weaker No. 3

Sprint Nextel Corp. (S) slumped 14 percent in New York trading after AT&T Inc. (T) agreed to buy T- Mobile USA from Deutsche Telekom AG (DTE) for about $39 billion, trumping Sprint’s effort to acquire the business.

With the takeover announced yesterday, AT&T would become the largest U.S. mobile-phone company. The deal still needs regulatory approval. Sprint also held talks with Deutsche Telekom about buying T-Mobile, people with knowledge of the matter said this month.

By acquiring T-Mobile, Sprint would have gained ground on larger rivals Verizon Wireless and AT&T. Now, AT&T could leave Overland Park, Kansas-based Sprint as a far weaker No. 3 player in the industry, said Craig Moffett, an analyst at Sanford C. Bernstein & Co. in New York.

“A Sprint deal is now off the table and Sprint is left to go it alone,” Moffett said in a research note today. The AT&T deal, if approved, makes Sprint’s prospects “decidedly worse,” he said.

Moffett cut his rating on Sprint to “underperform” and lowered his price estimate for the stock to $3 from $5, saying the company is worth about $9.2 billion. Moffett estimates Sprint’s operations are worth $22.2 billion and that the net value of its non-operating assets, including debt, cash and a stake in Clearwire Corp. (CLWR), is negative $13 billion.

Clearwire Combination

Sprint fell 69 cents to $4.36 at 4 p.m. in New York Stock Exchange composite trading, the biggest drop in two years. Sprint, up 19 percent this year before today, is giving up gains it made because of the expectations for a merger, said Jonathan Chaplin, an analyst at Credit Suisse Group AG.

“We thought Sprint would merge with T-Mobile,” New York- based Chaplin, who rates the stock “outperform” and has a price estimate of $8, said in a note yesterday. “If the AT&T-T- Mobile deal is approved, Sprint is locked into the No. 3 position against a dominant AT&T and Verizon.”

Sprint is now more likely to merge with Clearwire, the provider of wireless-broadband service using WiMax technology, said Peter Misek, an analyst with Jefferies & Co. in New York. That would be the quickest way for Sprint to gain a faster network, Misek said in a note. Sprint is the majority owner of Kirkland, Washington-based Clearwire.

Market Concentration

Sprint Chief Executive Officer Dan Hesse said this month the company remains committed to Clearwire and that “every option” for Sprint’s future involves the wholesaler and fourth- generation WiMax technology. Hesse said he’d like to see Sprint do more network sharing with Clearwire, which sells capacity from its own network to Sprint and other carriers.

Last month, Clearwire predicted improving earnings that could eliminate the need for additional funding. The unprofitable company had struggled to meet its funding needs, telling investors it could run out of cash by midyear before raising $1.325 billion in bonds in December.

Cristi Allen, a Sprint spokeswoman, declined to comment on Clearwire. Jeremy Pemble, a Clearwire spokesman, also declined to comment.

A union of AT&T and T-Mobile would dramatically change the U.S. wireless industry, leaving it dominated by two companies with control of almost 80 percent of the market for customers on contracts, Sprint said in an e-mailed statement.

Regulators “must decide if this transaction is in the best interest of consumers and the U.S. economy,” Sprint said.

Verizon Unlikely Bidder

Verizon and AT&T currently account for about 65 percent of U.S. wireless industry revenue, according to Moffett. If the acquisition were approved, AT&T would control 45 percent of the higher-margin contract-customer market, with Verizon owning 39 percent.

Verizon is unlikely to bid for Sprint because it would further concentrate the industry in two hands and risk additional regulatory scrutiny, Moffett said.

“A Verizon offer would put an exclamation point on the duopolization of the wireless business, jeopardizing the regulatory prospects of both deals,” he said.

Marquett Smith, a Verizon Wireless spokesman, didn’t return an e-mail seeking comment.

Credit-default swaps on Sprint surged 46.3 basis points to 307.8 basis points, the highest level in two weeks, according to data provider CMA. Credit swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of debt.

To contact the reporter on this story: Hugo Miller in Toronto at hugomiller@bloomberg.net

To contact the editor responsible for this story: Peter Elstrom in New York at pelstrom@bloomberg.net

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