Trouble for Sprint?

Yesterday, the share price of Sprint Nextel Corp. (S) tumbled 13.61% to $4.36 at the last close in the wake of an announcement that AT&T Inc. (T) will acquire Deutsche Telekom’s unit, T-Mobile USA. This was the worst drop witnessed in last two years.

We believe the falling share price faded all positive reactions that Sprint received this year following improved performance and a turnaround in post-paid wireless business.

Sprint shares was rising in the last two weeks on rumors that it would acquire T-Mobile for a 50% interest in the combined company. The market had even speculated that if the two companies reach an agreement, the combination will create an entity much stronger than the standalone companies. Such thoughts are now absurd, with Sprint losing the race at the starting point. This leaves the company lurking behind its rivals, AT&T and Verizon Communications Inc. (VZ).

The announced merger of AT&T and T-Mobile has raised worries for Sprint. If the merger is approved, it might significantly alter the structure of the overall telecommunication industry. AT&T and Verizon are already the prime wireless providers and the combined company would be almost three times the size of Sprint, which is currently the third-largest U.S. wireless carrier in the industry.

The merger would result in a wireless industry, dominated by two strong companies that control almost 80% of the U.S. wireless post-paid market. Post-merger, AT&T will become the largest GSM carrier with 130 million subscribers. Verizon is the largest CDMA carrier with almost 100 million subscribers. Sprint has a much lesser number of wireless customers of about 50 million.

Sprint’s share is eroding continuously in the U.S. wireless market due to its inability to provide competitive services. It is currently a loss making entity and its shares have lost more than 80% of their value since the announcement of the Nextel merger in December 2004. We believe the merged AT&T might further hurt Sprint’s profitabilty and shrink its subscriber base.

By the look of things, we believe Sprint will have little room to regain its lost market share. As of now, we are currently mainatining our long-term Neutral recommendation on Sprint with the Zacks # 3 (Hold) Rank.