Shares of Sprint Nextel s jumped 9% on speculation that it might be bought by Deutsche Telekom dt even as many analysts said such a deal would be difficult to pull off.
Shares of Germany's Deutsche Telekom, which owns T-Mobile USA, fell 1.5% Monday on concerns that an acquisition of Sprint Nextel would be too costly and tough to integrate. Sprint has a market value of $12 billion and more than $19 billion in long-term debt and other liabilities.
"Despite the potential benefits of a merger we believe a combination would also present several challenges," Piper Jaffray analyst Chris Larsen said in a research note.
Sprint and Deutsche Telekom declined to comment on reports that DT is looking at a bid for Sprint, first reported in Britain's Sunday Telegraph. CNBC, citing anonymous sources, reported that Sprint was not aware of any overtures from Deutsche Telekom.
Besides moving Sprint shares, the speculation also pushed up the company's bonds. Sprint's 6.875% bonds were up 4.25 cents at 78.5 cents on the dollar, according to Market Axess.]
A combination of Sprint, the No. 3 U.S. mobile service with about 49 million customers, and T-Mobile USA, the fourth- biggest in the United States with about 33 million, would create the second-largest wireless carrier in the country. They would vault past No. 2 U.S. service AT&T but still trail Verizon Wireless, owned by Verizon Communications and Vodafone Group.
While both Sprint and T-Mobile USA are losing ground in the fiercely competitive U.S. market, some analysts said a merger is unlikely to happen as it would be a technological nightmare. Sprint already runs two separate networks, both of which are incompatible with T-Mobile USA's network.
Larsen noted that the companies would have to build a single network in order to generate savings, and they could potentially lose more market share to rivals as they focus on the complicated integration.
Another analyst, John Hodulik of UBS, said a deal was unlikely given the "significant negative impact it would probably have on DT's financials."
Hodulik said that "any potential deal would be a negative" for Deutsche Telekom, whose shares fell 1.5% to 9.39 euros.
Heino Ruland from Ruland Research said Deutsche Telekom would need to raise capital if it was to put in a bid for Sprint.
"Even though strategically it would be the best move forward since quite some time for (Deutsche Telekom), it will weigh on the share price firstly because of that potential capital raising effort but secondly because of the timespan needed to return the U.S. peer to profitability," Ruland added.
Deutsche Telekom slashed its full-year profit forecast in April, partly due to a weak performance in the United States. The German incumbent last week agreed to a deal with France Telecom to combine the two companies' British mobile phone businesses —T-Mobile U.K. and Orange.
Speculation about a possible purchase of Sprint Nextel has circulated since the U.S. company announced a large goodwill write-off in February 2008 which sent its shares to a five-year low at the time.
The Sunday Telegraph said that Deutsche Telekom had appointed Deutsche Bank to advise on a possible run at Sprint.
Shares of Sprint rose 9% to $4.11. Sprint shares currently trade at about 4.2 times estimated 2010 earnings before interest, taxes, depreciation and amortization (EBITDA), said Michael Nelson at Soleil/Nelson Alpha research.