Market negative on Sprint-SK Telecom talks

Sprint Nextel Corp seems to have a tough time no matter what it tries to do.

Shares of Sprint and South Korea’s SK Telecom Co fell on news the telecommunications companies were in talks for a technology collaboration after previous efforts at a deal had collapsed.

Shares of Sprint lost almost 4 percent in afternoon trading on Wednesday, while SK Telecom closed down 2.7 percent.

Sprint and SK Telecom are discussing a possible pact for technology, but are not in talks for a merger, sources familiar with the matter had told Reuters. The talks may lead to the companies working together to create data applications for cell phones, one source had said. Sprint and SK Telecom declined to comment.

Some media reports said that SK Telecom is considering a minority investment in Sprint even though the No. 3 U.S. mobile telephone services company in November had rejected a $5 billion investment by SK Telecom and a group of private equity firm.

“We note that the previous funding offer was made when Sprint stock was at (about) $15 — 70 percent above current levels,” Goldman Sachs analysts said in research report. Sprint currently trades at about $8.70.

Analysts dismissed speculation that SK Telecom could buy Sprint, which has been struggling to stem the loss of subscribers and integrating its 2005 acquisition of Nextel. Sprint has a $26 billion market capitalization, compared with SK Telecom’s market cap of about $15 billion.

“The size of a potential outright acquisition of Sprint would be problematic given SK Telecom’s smaller size,” Goldman Sachs said. “This deal would require a sizeable cash component, an unlikely scenario in current capital market conditions.”

“SK Telecom’s interest in Sprint’s assets could be lessened given that Sprint agreed to cede partial control of its WiMax spectrum through a contribution into a Clearwire JV,” Goldman Sachs said.

Both SK Telecom and Sprint run wireless networks based on the same CDMA technology, which is widely used in the United States. They have also been looking at the emerging WiMAX technology for next-generation high-speed wireless data.

“What SK brings to the table: SK Telecom’s original proposal highlighted the following merits: (1) economies of scale on handsets/equipment, (2) experience in marketing and driving uptake of mobile data, and (3) technical/strategic expertise on both LTE and WiMax,” Goldman Sachs said.

Still, analysts said SK Telecom has had poor results from its overseas investments so far, especially in the United States. Last month, SK Telecom agreed to sell its money-losing U.S. mobile unit, Helio, for $39 million in stock to Virgin Mobile USA and to invest $25 million in Virgin Mobile. Both Helio and Virgin rent space on Sprint’s network.

A deal involving all three — Sprint, SK, and Virgin Mobile USA — could make more sense, said Lee Shi-hoon, an analyst at Hyundai Securities.