AT&T Deal Looks Bad for Sprint – What Can Sprint Do?

AT&T (NYSE:T) recently announced a $39 billion acquisition of T-Mobile, a topic that has sparked considerable debate. We presented our quick take on the deal in our article The Race for 4G: AT&T Buys T-Mobile. But what does this mean for Sprint (NYSE:S)? Sprint’s shares were down 14% on this news, suggesting concern among investors. Sprint’s primary competitors in the mobile business are AT&T and Verizon (NYSE:VZ).

Our price estimate for Sprint’s stock stands at $5.15 implying a 10-15% premium to market price.

Why Sprint is Worried

The deal could put the rest of the telecom industry at the mercy of AT&T and Verizon. Sprint’s CEO voiced this concern, stating, “I do have concerns that it would stifle innovation, and too much power would be in the hands of two.” ^[1]

Although Sprint has struggled over the past few years, its subscriber trends have begun to improve as a result of better customer service, network upgrade initiatives and the company’s low-cost advantage.

T-Mobile’s customers generate lower average revenue per user (ARPU) than that of AT&T, and the acquisition effectively removes this lower-price competitor from the market. With fewer big-name competitors to choose from, might customers revert to the comfort zone of the big two (AT&T and Verizon)?

Beyond that, might smartphone makers feel added pressure from the big two wireless carriers to offer devices exclusively to them, putting Sprint at a disadvantage? Put simply Sprint’ market share could be in trouble.

What Can Sprint Do?

There have been talks that Sprint could pitch itself as a potential acquisition target for cable companies or could even look to acquire smaller pre-paid competitors like MetroPCS or Leap. The issue here is that big cable companies like Comcast (NASDAQ:CMCSA) do not seem to be interested. ^[2]

Verizon has similar thoughts as well with regards to acquiring Sprint. Additionally, it may not be a great strategy for Sprint to acquire small players with low ARPU if it really wants to challenge giants AT&T and Verizon.

We believe that one option for Sprint could be to invest in improvement of its service, including a greater push into 4G. Both AT&T and Verizon are moving into LTE and it could put Sprint at a further disadvantage if the company simply relies on WiMax. Sprint would also do well to distinguish its product through new, powerful marketing campaigns.

1. Sprint CEO Blasts AT&T Deal, The Wall Street Journal, Mar 23 2011 [↩]
2. UPDATE: Sprint Scrambling For Options After AT&T/T-Mobile Deal, The Wall Street Journal, Mar 21 2011 [↩]