5/12/08: Not sure if the folks are RCR read my blogs, although there is one staffer there on my distribution list, but this cartoon by Chris Boyer of RCR was published on May 9, 2008:
See addendum (5/9/2008) at the bottom of this piece.
Sprint Nextel's market capitalization has surged about $9B to over $26B or by more than 50% over past three weeks as of the end of trading, May 6, 2008, most recently based on speculation that big changes are in the offing. The market and investors seem to be waking up to the idea that the piece parts of Sprint really do add up to more than the whole.
How a DT Bid Might Work
If Deutsche Telecom (DT) makes a bid for Sprint Nextel, as has been reported widely, it will be in large part motivated as a value play. DT will be betting that, in a worst case scenario, that is, one in which integration of all the different network technologies fails, the remaining assets (spectrum, cash flows from leftover subscribers, facilities, etc.) will be worth the strategic goals of enhancing international expansion, especially in the U.S., to better compete with Vodaphone. If a DT deal for Sprint were to happen today, DT will likely sell off either iDEN or CDMA and WiMAX, in order to: 1) finance the deal itself, and 2) Eliminate redundant networks. WiMAX is not on the GSM evolution path and the Sprint version operates at 2.5 GHz, which would not be easily compatible with T-Mobile's AWS auction winnings at 700 MHz and where T-Mobile announced last week that they would be deploying their own 3G services, staying on the LTE evolution path.
Nextel iDEN Network Is Once Again The Intriguing Asset
Although some might assume that the CDMA network might be the bigger prize, from a T-Mobile point of view, integration of the iDEN network might be easier: 1) iDEN uses a GSM core network that would be compatible with that of T-Mobile (wireless prepaid services based on GSM Intelligent Networks standards, for instance, might be integrated easier with iDEN), 2) From an RF point of view, at 800 / 900 MHz, the iDEN network might enable easier development of dual mode devices with the T-Mobile 700 MHz spectrum vis-a-vis the 1.9 GHZ PCS CDMA network, 3) iDEN's primarily business customer base might be more complementary to T-Mobile's low cost consumer base, offering a diversification opportunity (the same rationale could have been made three years ago at the time Nextel merged with Sprint). Lastly, T-Mobile's industry leading customer care practices and methods could accelerate the improvement of Sprint's major weak spot across any and all networks. On the other hand, Sprint's CDMA consumer-oriented brand and network might strengthen T-Mobile's position in that segment. That said, the following should be read in neon flashing boldface: An integration of CDMA and GSM networks has never been successfully achieved.
The bottom line here is that at DT move on Sprint could make sense if we don't get hung up on integration of up to five networks (GSM, iDEN, CDMA, WiMAX and GSM 3G) and focus instead on selling off redundant piece parts to avoid some integration issues, strategic fit, and the value play (although the value part appears to be diminishing as Sprint's stock price continues to spike).
Nextel Going Home?
So, what can be made of the other news that Morgan O'Brien et al may be making a move on iDEN assets, as I've pointed out as a possibility along with other scenarios here, here, and here? Without any inside information, but knowing only the interest and passion (and, no doubt, a degree of self-interest) that Morgan O'Brien has in pursuing public safety solutions, in addition to the intimate knowledge and pride he must have in having built the foundation for the Nextel network, the disclosure of such an interest in using the iDEN network as a first responder network should not be surprising. As I've blogged on before, Undoing the Merger is doable.
Ironically, in this whole picture, Sprint's CDMA network may end up being the orphaned child waiting for adoption in a breakup of Sprint (Alltel or Mr. Slim, are you listening?)
How Do WiMAX Delays Figure in the Big Picture?
Waiting for Sprint to finalize a deal that might spin off WiMAX is like watching a very drawn out Act 2, Scene 2 of Romeo and Juliet, with Juliet (Clearwire and its partners) calling out to Romeo (Sprint) to help take WiMAX away ("Deny thy father and refuse thy name; Or, if thou wilt not, be but sworn my love). That said, the delays reported in the availability of the WiMAX network probably don't matter in the big picture of a Sprint breakup. There will be value in WiMAX to Clearwire and the Cable guys, regardless of the outcome of a Nextel spin or DT takeover. Either way, Xohm can be used to raise cash to finance a deal by an acquirer or by Sprint itself to make itself more attractive to a suitor; Sprint would be one more degree less complicated and therefore, easier to value.
What Happens If All The Deals Don't Materialize?
The good news is that, if all the vultures lose interest in the Sprint carcass, CEO Dan Hesse appears to have an excellent grasp in evaluating and assessing his leadership team. Without getting specific, there are early signs that some of the leadership that has embodied the worst of the negative culture on the Overland Park campus has been or is being identified. There are also anecdotal blips indicating that customer care may be improving.
With all the drama swirling around Sprint these days that would impress a producer of a Mexican telenovela, and with the unsolicited help and advice being offered to Sprint, I believe that Dan Hesse is quietly and efficiently going about his business. If all the deals fall through, I believe Hesse has the talent to pull off a turnaround.
With Sprint being in play, there are only further upside possibilities from either a takeover, split up or operational perspective. I believe if one more new suitor checks in and registers interest in Sprint or a piece part, all the talk and rumor will turn into hot action very quickly. Perhaps after the earnings call on May, 12, 2008, we'll see more action.
A key aspect of my analysis contained a glaring factual error, which I should have known. Specifically, that T-Mobile's AWS spectrum won in 2006 and on which it was announced that they would be rolling out 3G / W-CDMA service, is paired spectrum at 1.7 GHz (uplink) and 2.1 GHz (downlink), rather than at 700 MHz as is stated in my article. After thinking through the implications of the actual location of T-Mobile's AWS spectrum, I've concluded the following: 1) The AWS spectrum still would not lend itself to be easily compatible or, at least, optimized, with Sprint's 2.5 GHz WiMAX spectrum because, while closer to 2.5 GHz than 700 MHz, the AWS spectrum was allocated by the FCC as frequency division duplex (FDD) rather than WiMAX's time division duplex (TDD) design; 2) Reason "2)" under the heading "Nextel iDEN Network Is Once Again The Intriguing Asset", starting with "From an RF point of view...", is no longer valid; and, 3) Despite the fact that T-Mobile AWS FDD spectrum is close to the Sprint PCS CDMA FDD spectrum at 1.9GHz, I still maintain that Sprint's CDMA network could ironically end up being the orphaned child for the following reason: Action on whether or not Sprint will be taken over or broken up will happen within the next year. An LTE rollout /swapout for a hypothetically combined T-Mobile W-CDMA / AWS spectrum network and Sprint CDMA / PCS spectrum network, is just too far into the future (at least 4 - 5 years) to impact a current decision by DT on whether or not to keep CDMA or iDEN in this scenario.