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Verizon-Sprint Faces Hurdles

Just days after Sprint Corp. (NYSE: FON) made like a big fish and announced a tentative $35 billion merger with Nextel Communications Inc. (Nasdaq: NXTL) (see Nextel-Sprint: Winners & Losers), it turns out there was a whale lurking in the pond. Verizon Communications Inc. (NYSE: VZ) is now making a bid to swallow Sprint, according to published reports, a deal that would make the combined company a telecom leviathan.

If the deal were completed, it would vault Verizon Wireless -- currently the No. 2 wireless company in the U.S. -- into the top position with more than 65 million customers. Cingular Wireless currently holds the No. 1 spot with 47 million customers after completing its acquisition of AT&T Wireless Services Inc. (NYSE: AWE) two months ago.

But it is far from a done deal, according to Mark Lutkowitz and Sam Greenholtz, principals at Telecom Pragmatics Inc. “There are a lot of issues to be worked out with such a deal,” Greenholtz says. “The first issue is for Vodafone to give the OK to pursue the deal. Last I heard, they were denying that they gave Verizon permission.”

“If Verizon makes an offer on Sprint, and Vodafone decides to walk, then Verizon has to buy out the 45 percent stake that they have in Vodafone,” Greenholtz says. “And that could mean Verizon is in for $80 to $90 billion -- including the Sprint deal -- and I don’t think they can pull that off.”

Greenholtz says that regulatory issues could be a factor that could derail a Verizon/Sprint deal, but, “the biggest issue is money.” He also says that, while some press has been reporting that the deal would include Sprint’s wireline network, it’s most likely to be just the wireless side. “If the wireline is included in a deal, Verizon would have to sell off so much to get regulatory approval,” Greenholtz says. “And they haven’t been able to sell off what they have now, so I think that’s unlikely.”

But William Bridges, senior VP of The Lido Group, a telecom investment consultancy, says the real meat of any deal would come only if Verizon could acquire Sprint’s long-haul wireline network. “All this deal does on the wireless side is to take one competitor out of the mix,” he says. “If Verizon is going to continue to build its out-of-region network -- which it is building like crazy -- then it will have to find some way to do that without leasing capacity, and [owning] Sprint’s network would allow them to do that.”

Bridges says that consolidation is good for the industry and was bound to happen. “I’m not sure that Sprint is the best network for Verizon to buy, but it’s the best that’s available out there now,” he says. “A better deal would be for them to acquire Qwest for its long-haul network. Look, Sprint was making a bid for Nextel to upgrade its network, and if Verizon wants to buy Sprint without Nextel, I’m not sure it buys them that much.” Lutkowitz points out that a Verizon/Sprint marriage does offer some advantages. “Verizon is more business oriented, and Sprint is consumer focused, so they would compliment each other nicely,” he says. “And Sprint is becoming a real threat to Verizon, so by making them a part of their organization they could eliminate that threat.”

He also points out that the whole point of a Sprint/Nextel deal was to further enhance Sprint’s identity. “If Verizon were to take over Sprint, then Sprint would cease to exist. I’m not sure they’re ready to give up their identity.” With so many hurdles to overcome, it could be some time before this whole drama plays out.

Greenholtz says he would bet on a Sprint/Nextel deal happening before a Verizon/Sprint deal. His partner, Lutkowitz was a bit more optimistic, giving 50/50 on a Verizon deal happening.

”There’s no doubt that Verizon is looking at Sprint.” Greenholtz says. "They have to be, with all that’s happening in the wireless space. They’d love to get back to being No. 1 in the wireless market. But I think a lot of people are getting excited about nothing at this point.” A Verizon spokesperson says, "We don't comment on rumor or speculation regarding mergers of acquisitions."

— Chris Somerville, Senior Editor, Next-Generation Services

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