news analysis With Sprint Nextel sorely in need of a capital injection, one company to watch is South Korean wireless operator SK Telecom.
Fund managers and others who follow the telecom industry say the Korean company, the biggest mobile carrier in the country, is determined to establish itself as a major player in the world's most influential consumer market. Moreover, a technological fit between the two makes Sprint a most coveted takeover target.
Since last fall, SK Telecom has twice grabbed headlines with its attempt to strike a deal with the struggling U.S. carrier, which has been losing customers to rivals AT&T and Verizon Wireless. A source closely following SK Telecom says Sprint, SK Telecom, and investment banks have had preliminary contact lately over potential deals that could give the Korean company a major stake and seats on Sprint's boards.
SK Telecom declined comment on media reports over negotiations for deals ranging from a strategic alliance to an outright acquisition partly funded by private equity funds. But the company does not hide its U.S. ambition. "We have been exploring and seeking opportunities to expand our business in the [United States] and other overseas markets," says spokesman Weon Hong Sik.
A U.S. credit crunch, declining asset value, and Sprint's worsening balance sheet have prompted SK Telecom to accelerate its drive to expand its beachhead in the United States Investment banks "have been constantly putting together various deals for SK Telecom to lay its hands on Sprint", says Michael Min, technology sector specialist at fund manager Tempis Capital Management in Seoul. The Korean company would not be satisfied with just a strategic alliance, he adds. "I bet it will seek board seats in any deal with Sprint."
Matching technology
The acquisition may make sense since both companies have invested in the same technology standards. They have relied on a cellular network using CDMA, the technological standard crated by San Diego's Qualcomm, and both are investing in wireless technologies such as WiMax. South Korea is years ahead of the United States in deploying wireless technology, and SK Telecom could use its expertise to roll out advanced mobile applications to Sprint customers as wireless Internet is about to take off.
Also, SK Telecom already has some ties to Sprint. The company has cut a deal to become the second-largest shareholder of Virgin Mobile USA, the wireless carrier initially set up as a joint venture between Sprint and Virgin Group. SK Telecom agreed in late June to sell its money-losing U.S. mobile unit, Helio, for US$39 million in stock to Virgin Mobile and to invest US$25 million in Virgin Mobile. The June deal will give SK Telecom two board seats and a 17 percent stake in Virgin Mobile, in which Sprint still has a small stake through its Sprint Ventures arm. Both Helio and Virgin rent space on Sprint's network. They account for about 10 percent of Sprint's subscribers and more than half of its wholesale users.
Expanding the relationship is taking time, though. Last fall, Sprint rejected a US$5 billion investment offer by SK Telecom and a group of private equity firms, including Providence Equity Partners. "There are a lot of uncertainties hanging over the current round of talks between SK and Sprint," says Yang Jong In, who has been following SK for brokerage Korea Investment & Securities. "But I don't rule out the possibility of the two hitting a sweet spot in terms of pricing and terms."
Skeptical investors
SK Telecom certainly needs to be looking abroad, given the limited growth prospects at home. It already controls about half of Korea's crowded mobile-phone market, which has little room for expansion. More than 90 percent of Koreans are cellular users, up from just under 70 percent in 2002. That is why, says SK Telecom Chief Executive Officer Kim Shin Bae, the company's emphasis is on developing data services and expanding overseas.
To underscore his commitment to the U.S. market, Kim last year established a US$110 million U.S. holding company. Company officials have said SK Telecom will continue to buy or forge alliances with local partners to expand its content and mobile financial-services business in the United States, China, and Vietnam, where it has stakes in local mobile operators.
Still, investors do not seem impressed with the Korean telco's overseas foray. On news that SK is seeking investment in Sprint, its shares fell 2.7 percent on Wednesday against a 0.1 percent loss in the Seoul bourse's benchmark Kospi index. In contrast, shares of Sprint jumped 9.4 percent overnight on hopes of an acquisition. "SK has shown disappointing outcomes from its overseas investments so far, especially in the [United States]," says Stan Jung, a telecom analyst at brokerage Woori Investment & Securities. "The market is sending out a negative signal to SK taking risks with Sprint."
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