Sprint and T-Mobile Merger?

Rumors are going around about the possible acquisition of Sprint-Nextel by the parent company of T-Mobile, Deutsche Telekom, which recently merged T-Mobile UK and Orange UK to be the leading UK carrier. Both Sprint and T-Mobile have been losing subscribers due to the intense competition between the iPhone, available on AT&T, and the BlackBerry, available on Verizon. Let’s take a closer look.

On July 29, Sprint Nextel Corp. (NYSE:S) reported second quarter results that missed estimates. Q2 revenue was down 10% to $8.14 billion and net loss was $384 million or $0.13 per share versus loss of $344 million or $0.12 per share last year. Analysts expected loss of $002 per share on revenue of $8.12 billion. Q1 analysis is available here.

Wireline revenues were down 11% y-o-y and 3% q-o-q to $1.4 billion as legacy voice and data declines continued to offset Internet revenue growth. Internet revenues increased 10% and account for 41% of wireline revenue compared to 33% in Q208.

Wireless service revenue declined 9% y-o-y but was the same as last quarter at $6.4 billion as revenue growth from ‘Boost Monthly Unlimited’ subscribers offset revenue declines from post-paid subscribers. The total number of customers at Sprint was 48.8 million, which includes 34.4 million post-paid subscribers (25.1 million on CDMA, 8.3 million on iDEN, and 1.0 million Power Source users who utilize both networks), 5.0 million prepaid subscribers (4.4 million on iDEN and 600,000 on CDMA) and 9.3 million wholesale and affiliate subscribers, all of whom use its CDMA network. Total wireless customers declined by approximately 257,000, including 991,000 post-paid customers, down from 1.25 million last quarter. Postpaid churn was 2.05% compared to 2.25% in the fourth quarter and 1.98% last year. Postpaid ARPU was stable at $56.

On June 6, Sprint launched the Palm Pre and on July 12, it launched RIM’s BlackBerry Tour. As a result, postpaid smartphone and touch devices ARPU was more than $80, and churn was less than 1.5%. Although its net adds still need to improve, the company says that “the sequential quarterly change in postpaid CDMA net adds was the best we have seen since the first quarter of 2007.” Sprint said that most Pre sales were to existing Sprint customers and helped mitigate the effect of the iPhone. The company added that it will continue to be the exclusive provider of the Palm Pre into 2010.

Its Boost Unlimited prepaid offer attracted 770,000 net adds, which is the highest reported level of prepaid performance by any U.S. carrier in three years. To add to its prepaid momentum, Sprint has acquired Virgin Mobile U.S.A, in which it already had a 13.1% stake.

Sprint decreased it net debt by $700 million to $16.4 billion and ended the quarter with $4.6 billion of cash and cash equivalents. It generated $676 million in free cash flow as it halved its capex. The company has made significant progress in improving customer service and has been able to discontinue 12 call centers year-to-date due to fewer calls to customer care. The stock is currently trading around $3 with market cap of about $10 billion. It hit a 52-week high of $5.94 on May 20.

T-Mobile, in its second quarter results, reported 325,000 net new customers, down from 415,000 last quarter and 668,000 last year. The company ended the quarter with 33.5 million customers, up from 33.2 million last quarter. Churn was 2.2%, down from 2.3% last quarter and up from 1.9% last year. ARPU was $48, the same as last quarter but down from $52 last year. Total revenue was $5.34 billion, down from $5.47 billion last year, mainly due to a high number of low ARPU customers. Net income was $425 million, up from $322 million last quarter and $452 million last year. Q1 analysis is available here.

It recently announced that Motorola’s Android phone CLIQ will be available on T-Mobile’s network from November 2 for $199.99.

T-Mobile USA accounts for about 24% of parent company Deutsche Telekom AG’s (NYSE:DT) revenue. DT reported second quarter revenue of €16.2 billion, up by 7.4%. Net income was €521 million compared to net loss of €1.12 billion last quarter. T-Mobile Deutschland, the exclusive carrier for the iPhone in Germany, reported a 2.2% decline in revenue to €3.8 billion in the first six months. Revenue at T-Mobile UK decreased by 4.2% in the first half of the year.

Though Deutsche Telekom’s acquisition of Sprint-Nextel would place the latter closer to the top, they operate on different networks, which could pose serious network integration problems. Sprint has already faced such problems problems with Nextel. As Bloomberg reports, it is more likely that Deutsche Telekom would go for Sprint’s 4G network.

DT is currently trading around $13.20 with a market cap of about $57.31 billion.