A Sprint (S) Takeover of T-Mobile is 'Aspirational', But a Pre-Paid Deal May Not Be - Analyst (PCS) (LEAP)

September 11, 2012 11:57 AM EDT
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Shares of Sprint (NYSE: S) have doubled over the past several months and one of the big reasons is investor interest regarding potential M&A. Analysts at Goldman Sachs discussed the potential of a 'landscape-altering deal' and some other options for the wireless carrier.

A deal with T-Mobile has been widely speculated about, and Goldman believes the a deal to combine the No. 3 and No. 4 operators makes sense. That said they also believe a potential Sprint/T-Mobile deal still has an "element of circular logic to it," so their sentiment is tempered.

To pull off such a deal, Sprint has a lot of obstacles, the firm notes, including: (1) pro forma balance sheet constraints; (2) equity currency contribution to Deutsche Telekom (DT), maximizing the value attributed to DT but minimizing DT’s equity ownership; (3) giving DT appropriate assurance a deal can be approved by regulators (T had to offer up a $6bn break fee).

A combined Sprint/T-Mobile could potentially be the largest non-LBO issuer in the high yield market at $35 billion, Goldman notes. Also, under almost any scenario, DT would have to retain significant equity ownership in the combined entity.

While recent commentary suggests that Sprint could be considering proposing a deal to T-Mobile, "the mechanics suggest that such a deal is aspirational." However, a smaller deal for a prepaid operator like Leap Wireless (Nasdaq: LEAP) and MetroPCS (NYSE: PCS) may be a more logical route for Sprint.

Goldman maintained their Neutral rating and $3.75 price target on Sprint.

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