Sprint Nextel Corporation (S)’s Big Deal Shakes Up the Telecom Sector

The U.S. telecom sector has been consolidating through a series of deals in the past few years. The trend started with AT&T Inc. (NYSE:T)’s acquisition of BellSouth for $86 billion in 2006, then continued with Deutsche Telekom’s approved reverse takeover of MetroPCS Communications Inc (NYSE:PCS) by its T-Mobile USA subsidiary, and led from there to Sprint Nextel and DISH Networks’ bid to take full control of wireless provider Clearwire Corporation (NASDAQ:CLWR).

The latest potential merger is DISH Network Corp. (NASDAQ:DISH) unsolicited $25 billion bid for Sprint Nextel Corporation (NYSE:S), the third-largest US mobile phone operator. DISH seeks to outbid Japanese telecom Softbank’s  offer of $20.1 billion for 70% of the U.S.’s No. 3 wireless provider.

What Does DISH See In Sprint?

DISH has a large range of spectrum holdings that could complement Sprint’s. The company’s revenues, especially its satellite video business, are decreasing. The deal would combine Dish’s TV users (approximately 14 million) with Sprint’s mobile phone customers (around 47 million), and could offer wireless, TV, Internet, and landline  services from a single provider.

DISH is offering cash and stock, but critics are concerned about the financial health of the combined entity, which would have approximately $40 billion in net debt. This is a dangerous and aggressive leveraged buyout from DISH Network Corp. (NASDAQ:DISH). Moreover, the satellite company will have to spend a lot of money after the acquisition to build a network that unites both companies’ spectrum holdings.

On the other hand, if Sprint Nextel Corporation (NYSE:S) were acquired by Softbank, it could become a solid competitor for Verizon Communications Inc. (NYSE:VZ) and AT&T Inc. (NYSE:T). Masayoshi Son, Softbank’s CEO, has wanted to expand his company internationally for a long time, and this could be the opportunity. Softbank has a strong cash chest of about $8 billion, which it could use to help fund the acquisition and beat DISH’s offer.

How Will This Deal Affect AT&T And Verizon?

In 2012, Verizon  and AT&T collectively commanded 65% of the U.S.  market for wireless carriers. While they seem to have little to fear from any rival, a DISH-Sprint deal could still plague them, since the new combined company would have more than double the spectrum of its rivals. That might let Sprint offer its customers more capacity for data transmission — especially if Sprint Nextel Corporation (NYSE:S) and DISH’s bid for Clearwire Corporation (NASDAQ:CLWR) also succeeds.

To fend off such a rival, both major telecoms will need to be in top shape. Verizon Communications Inc. (NYSE:VZ) got off to an excellent start in 2013. Its operating earnings increased 19.8% to $6.2 billion in the first quarter of 2013, compared to the same quarter of 2012. It has grown revenues in both its wireless ($19.5 billion) and wireline ($3.6 billion) segments. Its operating margin reached a superb 21% for the quarter, compared to 18.4% in the first quarter of 2012.