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iPhone Causes Sprint Deal Hang Ups


Apple (AAPL) may be taking a bite out of Sprint's (S) acquisition ability as the nation's third largest carrier tries to digest a spectrum partnership with Clearwire (CLWR) and hunt for deals to grow its subscribers.

In October Sprint announced a $15.5 billion four year deal to carry the iPhone and keep pace with its larger competitors AT&T (T) and Verizon (VZ). That deal -- and a commitment to improving smartphone services through a program called "Network Vision" and a multi-billion dollar 4G build with Clearwire -- may be the reason that Sprint's board reportedly iced a $7.3 billion acquisition of MetroPCS (PCS).



Sprint Chief Executive Dan Hesse was "hours away" from announcing a deal to buy MetroPCS until the board vetoed the acquisition last Wednesday, according to Friday reports by CNBC. Analysts now say that while an acquisition of MetroPCS and its pre-paid cellular service competitor Leap Wireless (LEAP) are likely in the user and service growth starved wireless industry, Sprint's expensive commitment to Apple and Clearwire made a deal untenable in the near-term.

Sprint's inability to cut a deal, taken with weaker than expected fourth quarter industry profitability, may signal that wireless carriers are struggling to find returns on surging iPhone sales, which drove record quarterly profit at Apple. The Sprint deal also may highlight new reasons why failed consolidation is a possible industry game changer, even as analysts and investors expect 2012 deals.

"As the failure of this transaction makes clear, Sprint's ability to play the consolidator role is highly uncertain, at least any time soon," writes Craig Moffett of Bernstein Research in a Monday note reacting to the failed Sprint and MetroPCS tie-up. That's because Sprint may need billions to invest in its Clearwire 4G service build, while the company paid a hefty price to carry the iPhone. "They are burdened with a gigantic and seemingly uneconomic Apple contract that has already depressed margins and that is likely to continue to do so for years," adds Moffett, who has a "market weight" rating on Sprint and an "overweight" rating on MetroPCS shares, with $2.50 and $13.00 price targets, respectively.

Still, according to analyst price targets Sprint and Clearwire are two wireless plays with high risk and reward on their success of a now closer-tethered spectrum partnership.

Sprint and Clearwire shares fell less than 1% in Monday trading to $2.45 and $2.10, respectively. Sprint shares are up roughly 10% year-to-date but have dropped over 40% in the last 12 months, while Clearwire shares have posted a smaller 8% 2012 gain to go with a near 60% stock drop in the last 12 months.

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