Sprint Cheaper Than 99% of S&P 500 Signaling Merger: Real M&A

Sprint Nextel Corp. (S)’s shares are so battered after AT&T Inc. (T)’s $39 billion offer for T-Mobile USA that investors are valuing the third-largest U.S. mobile phone carrier at a discount to its net assets.

Sprint’s 11 percent slide to $4.49 since the T-Mobile USA deal was announced March 20 through yesterday left its stock trading below the company’s $4.87 a share in assets minus liabilities. That means investors can buy Sprint for 92 cents on the dollar, cheaper than 99 percent of companies in the Standard & Poor’s 500 Index excluding financials, according to data compiled by Bloomberg. Sprint’s licenses from the U.S. Federal Communications Commission, which give it the right to operate its network in specific regions, alone are worth $19.9 billion, 44 percent more than its market capitalization of $13.8 billion.

AT&T’s purchase of T-Mobile USA from Deutsche Telekom AG (DTE) will give the combined company more than double the customers of Sprint, while Verizon Wireless has almost twice the market share. To boost value, Overland Park, Kansas-based Sprint may buy the remaining stake in partner Clearwire Corp. (CLWR) or another carrier such as MetroPCS Communications Inc. (PCS), according to Dan Hays, a director at consultancy PRTM. It may also become a target for Verizon as carriers that run on the same network technology are forced to combine, he said.

“Someone, whether it’s Sprint or Verizon, is going to have to serve as a catalyst for the consolidation,” said Washington- based Hays, who specializes in telecommunications. “What’s clear is that they can’t all afford to remain independent.”

Today’s Trading

Cristi Allen, a spokeswoman for Sprint, declined to comment on potential acquisitions. Marquett Smith, a spokesman for Verizon Wireless, declined to comment, as did Clearwire’s Susan Johnston and Jim Mathias of Richardson, Texas-based MetroPCS.

Shares of Sprint rose 1.6 percent to $4.56 on the New York Stock Exchange today. Clearwire slid 0.1 percent to $5.34, while MetroPCS climbed 1.8 percent to $15.78.

Sprint had held discussions with Bonn-based Deutsche Telekom about buying T-Mobile USA prior to the AT&T announcement, people with knowledge of the matter said this month. Talks had been on and off, and the companies disagreed on the value of T-Mobile USA, the people said. Sprint’s shares had surged 19 percent this year before the AT&T deal was announced.

With the purchase of T-Mobile USA, AT&T will surpass Verizon as the largest U.S. wireless carrier, in a deal the company said may take a year to close. Dallas-based AT&T anticipates having to divest some network assets and subscribers as a condition for regulatory approval, a person with knowledge of the situation said this week.

‘Odd Man Out’

Chief Executive Officer Dan Hesse, 57, said Sprint plans to submit its concerns over AT&T’s proposed acquisition of T-Mobile USA to Congress because the combination hurts the wireless industry and will have “tremendous” power.

“They got stood up at the altar,” said Kevin Smithen, a New York-based analyst at Macquarie Group Ltd., who rates Sprint “underperform.” “Without that transaction, we believe that Sprint is the odd man out.”

Sprint gained 0.5 percent yesterday, leaving it valued at 0.92 times net assets, data compiled by Bloomberg show. That’s cheaper than all the other 420 non-financial stocks in the S&P 500 except for three utilities: Princeton, New Jersey-based NRG Energy Inc. (NRG); Constellation Energy Group Inc. in Baltimore; and St. Louis-based Ameren Corp. (AEE)

The price-to-sales ratio of 0.41 for Sprint was also the cheapest among 50 companies in the MSCI World Telecommunication Services Index, according to data compiled by Bloomberg.

‘Destroying Value’

Sprint’s shares traded as low as 0.18 times book value in November 2008, two months after New York-based Lehman Brothers Holdings Inc.’s collapse deepened the worst financial crisis since the Great Depression, the data show.

“It’s a reflection of their weak performance for a number of years,” said Kevin Shacknofsky, who helps manage $7 billion in Purchase, New York, for Alpine Mutual Funds. “When you trade below book, it means that you think management is destroying value. They are not getting returns on investments they are putting in the network in building the business.”

Sprint listed net assets of $14.5 billion at the end of 2010, according to a filing with the U.S. Securities and Exchange Commission. Total assets amounted to $51.65 billion, while it had $37.11 billion in liabilities.

Property, plants and equipment were valued at $15.2 billion, after depreciation costs, and intangible assets were $22.7 billion, mostly made up of $19.9 billion in FCC licenses.

Market Share

AT&T’s absorption of T-Mobile USA and its 34 million customers will leave Sprint further behind with 16 percent of the U.S. wireless market. The new AT&T will have 39 percent and Verizon Wireless has 31 percent, according to data from research firms EMarketer Inc. and ComScore Inc.

Sprint will likely consider buying other companies that use the same network technology, known as CDMA, said Michael Nelson, a New York-based analyst at Mizuho Securities USA Inc. The standard is shared by Verizon Wireless, MetroPCS, Leap Wireless International Inc. (LEAP) and U.S. Cellular Corp. of Chicago. AT&T and T-Mobile USA are on the GSM standard, used more worldwide.

“They were in the bidding for T-Mobile. Therefore, they are clearly looking for acquisition candidates to help them grow their capacity,” said Peter Jankovskis, who helps manage about $2.7 billion at Oakbrook Investments in Lisle, Illinois. “They are further behind the curve than their competitors are. So, they are facing higher costs to upgrade and keep pace.”

Leap Wireless

Sprint may consider acquiring MetroPCS, which has a market value of $5.5 billion, and Leap Wireless, a $1.2 billion company, said Nelson, who recommends buying Sprint shares. Purchasing both would still leave Sprint with less than 21 percent of the wireless market, the data from EMarketer and ComScore show.

Greg Lund, a spokesman for San Diego-based Leap Wireless, declined to comment. The company’s shares advanced 2 percent to $15.02 today.

Sprint may also buy the 46 percent of Kirkland, Washington- based Clearwire that it doesn’t already own, said PRTM’s Hays and Macquarie’s Smithen. The cost to buy the stake, meet Clearwire’s funding needs for its construction and update the network to a more commonly used technology standard may reach $4.5 billion, Smithen said.

Sprint had $20.2 billion in debt at the end of last year, while cash and near cash items totaled $5.17 billion, data compiled by Bloomberg show.

Credit Ratings

The wireless carrier is currently rated B1H, four levels below investment grade, according to Bloomberg’s Company Credit Ratings, which analyze borrowers based on indebtedness, market capitalization, profitability and other financial ratios.

If Sprint’s long-term debt were to climb by $6 billion in an acquisition, its credit ranking would drop one level to B1, Bloomberg’s ratings show. An increase of $4.5 billion, Smithen’s estimated price tag for Clearwire, would not change its rating.

Verizon may also consider acquiring Sprint to regain its title as the largest U.S. carrier, PRTM’s Hays said. Verizon Wireless is co-owned by New York-based Verizon Communications Inc. (VZ), which holds a 55 percent stake, and Vodafone Group Plc (VOD) of Newbury, England.

Shares of Verizon Communications gained 0.5 percent to $37.18 today, while Vodafone rose 0.7 percent in London.

“In the past few years, Verizon has been satisfied to let Sprint hand over subscribers on its own,” Hays said. “If we’re now faced with a race to be the biggest, Verizon has to look at Sprint.”

‘Don’t Know How’

Verizon Wireless Chief Executive Officer Dan Mead has said the company isn’t interested in buying Sprint, according to Verizon’s spokesman Smith.

Sprint has lost money every year except one since acquiring Nextel Communications Inc. in 2005 for $45.9 billion including assumed debt. Customers abandoned the carrier after complaints about call quality as Sprint struggled to integrate the Nextel network into its operations. The company wrote down most of the acquisition, and the stock has retreated 81 percent since the deal was completed in August 2005, Bloomberg data show.

“We don’t own Sprint. There’s a reason we don’t own it,” said Michael Cuggino, who oversees more than $11 billion at Permanent Portfolio Funds in San Francisco. “AT&T and Verizon are taking the right steps to remain competitive and achieve growth, whereas Sprint appears to be falling behind. I don’t know how Sprint deals with that.”

Overall, there have been 5,295 deals announced globally this year, totaling $539.4 billion, a 21 percent increase from the $444.3 billion in the same period in 2010, according to data compiled by Bloomberg.

To contact the reporters on this story: Amy Thomson in New York at athomson6@bloomberg.net; Rita Nazareth in New York at rnazareth@bloomberg.net.

To contact the editors responsible for this story: Daniel Hauck at dhauck1@bloomberg.net; Katherine Snyder at ksnyder@bloomberg.net; Peter Elstrom at pelstrom@bloomberg.net.

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