Sprint Could Buy Ntelos' Wireless Business: Analyst

Sprint Nextel Corp. (S), the third largest wireless carrier in the United States, could acquire Ntelos Holdings' (NTLS) wireless business, an analyst at RBC Capital Markets wrote in a note to clients.

We maintain that Sprint is the most likely acquirer of Ntelos' wireless business, as it does not own a wireless network in a sizable portion of the company's wireless footprint, and therefore incurs wholesale and roaming expenses, analyst David Coleman said.

We believe Verizon (VZ) and US Cellular (USM) could also be potential bidders, although less motivated than Sprint, Coleman wrote.

Meanwhile,Virginia-based Ntelos provides communication services for Sprint Nextel's CDMA wireless customers in western Virginia and West Virginia, a deal that generates about $27 million per quarter of high-margin wholesale and roaming revenues to Ntelos.

Further, the agreement precludes Sprint from owning and operating a CDMA wireless network in the territory through 2014.

Coleman has upgraded Ntelos to 'outperform' from 'sector perform' and raised his price target on the stock to $22 from $19, citing potential M&A.

The analyst estimates enterprise value of Ntelos wireless business to be $1.78 billion and equity value to be $1.02 billion. Based on 41.7 million shares outstanding, Coleman sees takeout valuation at $25 a share, a premium of 36 percent over Ntelos' closing price on Dec.8, when the company announced its separation plans.

As of Sept.30, the wireless retail business had 433,698 subscribers representing about 7 percent penetration of the company's total covered population. For the last twelve month period ending Sept. 30, 2010, the company reported wireless revenues and adjusted earnings before interest, tax and amortization (EBITDA) of $406.4 million and $148.8 million, respectively.

On Dec.8, Ntelos said it plans to separate its wireline and wireless business through a tax-free spin-off of its wireline business to shareholders. The spin-off is expected to be completed in the second half of 2011.

We believe separation does make eventual M&A of either business more likely, and as such, we value NTLS equity on a sum-of-the-parts takeout basis, the analyst wrote.

Coleman said there are several potential bidders for Ntelos's wireline business, including CenturyLink (CTL), Frontier Communications (FTR), Windstream (WIN), and TDS Telecom (TDS), given the rapid consolidation among landline telcos.

The analyst noted that Ntelos's landline assets may have the most strategic appeal to Frontier Communications, which has a significant West Virginia footprint.

For the twelve month period ended Sept. 30, the company's wireline operations generated about $214 million in revenue and $105 million in adjusted EBITDA.

Ntelos Holdings sells wireless and wireline communication services in Virginia and West Virginia under the Ntelos brand.

Shares of Ntelos closed Thursday's regular trading session at $19.36 on Nasdaq. For the past 52-weeks, the stock has been trading in the range of $15.89 to $20.35.