Coming in from afar, Deutsche Telekom and its T-Mobile division seem to be pressing closer in the race of the latest wireless consolidation that involves MetroPcs (PCS)as a potential acquisition target. Surprisingly or not, the emerging sprinter is not someone who otherwise calls itself Sprint (S). It’s no secrete that the success of wireless communications companies lies within a carrier’s ability to provide a network coverage that is large and potentially unlimited. Thus, we see wireless carriers continuing to fill their uncovered signal spots through either acquiring additional airway spectrum or merging with another carrier all in the name of expanding their network coverage.
Wireless providers rely on the geographical reach of their wireless service to acquire and retain customers. The less concerned potential customers are about roaming out of a carrier and its affiliates’ service zone, the more likely those potential customers may become actual subscribers. Customer subscription base is a very important measure that wireless companies use to track the growth of their business. Constrained by the limited areas that their wireless networks can actually cover, smaller carriers often operate at a competitive disadvantage, and they try to offset this with better pricing and special service plans. Or else, these companies look for opportunities to merge with another carrier.
Based on the number of subscribers, T-Mobile would still lag behind Sprint and remain as the fourth wireless carrier even after the proposed MetroPCS purchase that would add 9.3 million MetroPCS customers to T-Mobile’s own tally of 33 million customers. Nonetheless, given the 56 million subscribers that Sprint currently has, the combined T-Mobile and MeetroPCS may put themselves in a striking distance to potentially unseat Sprint from its current third place. However, the Sprint position is somewhat a distant third as Verizon and AT&T, the two market leaders, each have over 100 million subscribers. Chased by smaller players from behind and unable to catch up to larger competitors in the front, Sprint is in a difficult situation in the ongoing wireless contest.
The acquisition of Nextel many years ago was supposed to bring Sprint closer to the frontline, but incompatible networks between the two companies caused much customer defection rather than an acceleration in customer expansion. With little revenue growth in the last two years after previous periods of revenue decreases, as well as sustained capital expenditure and operating expense, Sprint has been losing money for the last five years, resulting in an ever shrinking shareholders’ equity. Now, after years of investments and restructuring, Sprint is reported to be on the verge of being profitable for the first time in a long time. But a potential merger between T-Mobile and MetroPCS could lead to more roadblocks to Sprint’s already struggling progression.
The choices for Sprint to do another acquisition may be limited. Among smaller carriers, MetroPCS is the only one that has done well over the years. Clearwire (CLWR) and Leap Wireless (LEAP) are the other two principal players in the small-carrier field with 11 million and six million subscribers respectively. By using a unique pricing structure and targeting particular groups of customers, many of whom are prepaid users, MetroPCS has seen steady growth in both revenue and operating profit. MetroPCS stock currently is trading at about one and half time its book value, and the proposed purchase by T-Mobile may value the company at doubling its current equity value, a positive outlook by the acquirer on the future performance of the target. On the other hand, both Clearwire and Leap Wireless have been operating at a loss for multiple years, making them less likely as an acquisition candidate. T-Mobile actually considered buying Leap Wireless at one time but eventually left it out.
As some may know, Sprint is already part of an investor group that owns Clearwire. Thus, running out of acquisition targets, Sprint may have to make a higher counter bid for MetroPCS as some have speculated. But that would cost it dearly. In any event, there seems to be a tough road ahead for Sprint, despite a wild run of over 100 percent increase in its stock price this year.
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