What happens to Sprint, Clearwire and LightSquared? AT&T + T-Mobile USA ramifications

Woe to the rivals of AT&T (NYSE:T) and T-Mobile USA this morning: Executives from all of the nation's major wireless carriers likely are holed up in their respective war rooms, debating strategy and discussing their next moves.

And it's a good bet the C-level meeting rooms at Sprint Nextel (NYSE:S) are overflowing, as CEO Dan Hesse and his team struggle to squeak out a win from what many are calling a disaster. (Sprint's stock was down more than 12 percent in early trading.) Sprint had been rumored just days ago to be in discussions for a merger with T-Mobile, but it seems the deal didn't sit well with Sprint executives--or AT&T pulled the rug out.

"We believe that Sprint in particular is at risk as they have lost a potential merger partner and gained an even more formidable competitor," wrote Jamie Townsend of TownHall Investment Research of the AT&T/T-Mobile deal. "Being third in a two horse race is troublesome."

Charles Golvin, an analyst with Forrester Research, largely agreed with Townsend's downbeat assessment of Sprint's prospects, noting to Fortune that AT&T's LTE push--bolstered by T-Mobile's spectrum--could widen the gap between the nation's two largest wireless carriers and Sprint.

William Ho of Current Analysis pointed out that Sprint is now the odd man out in terms of LTE--Verizon Wireless (NYSE:VZ) and AT&T (and now T-Mobile) will deploy the network technology on 700 MHz and AWS spectrum, while Sprint doesn't own any 700 MHz or AWS spectrum. However, Ho said, Sprint could potentially purchase AWS spectrum from the SpectrumCo cable company joint venture that won around $2.4 billion worth of AWS during the FCC's 2006 auction.

Others though see opportunity for Sprint. If the combination of AT&T and T-Mobile is approved, "it will allow Sprint to more clearly define itself as the value leader in the U.S. market and create more space for it in that segment," explained Roger Entner, an analyst with Recon Analytics and a FierceWireless contributor.

Separately, industry analyst and FierceWireless contributor Mark Lowenstein noted Sprint could pick up additional wireless markets if AT&T is forced to divest T-Mobile assets as part of the deal.

In a statement, Sprint telegraphed its plans to fight the combination of AT&T and T-Mobile with fervor: "If approved, the merger would result in a wireless industry dominated overwhelmingly by two vertically-integrated companies that control almost 80 percent of the U.S. wireless postpaid market, as well as the availability and price of key inputs such as backhaul and access needed by other wireless companies to compete. The DOJ and the FCC must decide if this transaction is in the best interest of consumers and the US economy overall, and determine if innovation and robust competition would be impacted adversely and by this dramatic change in the structure of the industry."

Interestingly, the merger of the nation's two main GSM carriers has sparked prognostication that Verizon Wireless should purchase Sprint in order to compete. Noted Lowenstein: "I think this (a Verizon-Sprint merger) is unlikely. AT&T needs T-Mobile a lot more than Verizon needs Sprint. Verizon has an excellent spectrum position in most major markets. Sprint and all its financial entanglements and mishpocheh would be complex and redundant for Verizon and its 45 percent owner, Vodafone, to digest. More likely for Verizon: a series of smaller, more surgical moves. And, at some point, taking the remaining 55 percent of the company back from Vodafone."

Lowenstein also floated the possibility of Sprint being acquired by a major cable operator; Sprint has a long history--primarily centered on its now-defunct Pivot effort--of working with the likes of Comcast and Time Warner Cable.

Nonetheless, If Sprint wishes to continue to compete on a national scale, the company may well be forced to conduct its own blockbuster merger, possibly with fellow CDMA operators like Leap Wireless (NASDAQ:LEAP) or MetroPCS (NYSE:PCS).

The merger of AT&T and T-Mobile is a trickier issue for Clearwire (NASDAQ:CLWR) and LightSquared. For Clearwire, an AT&T-T-Mobile tie-up likely erases all possibility of T-Mobile becoming a wholesale customer--or even of purchasing excess Clearwire spectrum. Clearwire is facing a dire cash crunch, and potential investors could be scared off by the massive weight AT&T could wield with T-Mobile.

"The Clearwire predicament  has gotten worse, in our view," wrote Townsend of TownHall Investment Research. "We continue to believe that Sprint is moving away from a longer term commitment to Clearwire and its WiMAX network. We also believe that the value of Clearwire's spectrum portfolio has decreased due to this deal and the likelihood of a meaningful spectrum sale by the company (much less equity deal) has become even less."

As for LightSquared, an AT&T purchase of T-Mobile could push the venture into the arms of Sprint. Sprint has been rumored to be in negotiations with LightSquared--despite (or because of) Sprint's current relationship with Clearwire--and a stronger AT&T might ignite a fuse that would push Sprint toward LightSquared's LTE plans. PRTM analyst Daniel Hays said that the deal will intensify pressure on all other operators and that "Sprint will also probably bolster its 4G position by teaming with LightSquared and aligning with the growing adoption of 4G LTE."

And what of the nation's smaller wireless carriers, including Leap Wireless, MetroPCS, U.S. Cellular and Cellular South? In its FAQ on the deal, AT&T answers a resolute "no" to the question: Are there any competitive concerns? "The U.S. wireless industry is and will remain fiercely competitive following this transaction," AT&T declared. "Local market competition is escalating among larger carriers, low-cost carriers and several regional wireless players with nationwide service plans."

AT&T rivals likely would strongly disagree with the carrier's assessment. Indeed, the national GSM roaming business alone could undergo profound changes if AT&T acquires the country's only other GSM carrier. Further, MVNOs like TracFone would see their nationwide GSM options reduced from two to one, and the rates they pay could reflect that change.

Of course, smaller, prepaid carriers also could be relieved to see T-Mobile bowing out--T-Mobile occasionally sought to challenge low-cost prepaid and postpaid operators in some markets.

Finally, executives at Verizon Wireless likely are settling into their war room for the long haul. Most notably Verizon Wireless will lose its claim on the top slot if AT&T's purchase of T-Mobile is approved: A combined AT&T and T-Mobile would count almost 27 million more subscribers than Verizon. Further, AT&T's planned LTE network eventually could stretch farther than Verizon's planned buildout--though Verizon clearly is in the lead right now.

When questioned for a response to AT&T's proposed merger with T-Mobile, a Verizon spokesman replied with a jolly "No, thanks!"

Complete Fierce coverage of AT&T/T-Mobile:
--AT&T to buy T-Mobile USA for $39B
--Will regulators approve the AT&T/T-Mobile USA deal?
--AT&T/T-Mobile merger scrambles long-term handset picture
--Is acquiring T-Mobile USA the answer to AT&T's data demands?
--AT&T, T-Mobile USA merger as much about HSPA as it is about LTE
--After AT&T deal, Deutsche Telekom to refocus on Europe

For more:
- see this Roger Entner column
- see this FierceWireless article
- see this Fortune article

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Sprint's SpectrumCo withdrawal a smart move
Cable companies exit Pivot JV with Sprint
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