* Deutsche Telekom in MetroPCS/T-Mobile USA merger talks
* DT says "significant" issues still outstanding, deal not certain
* Analysts say Sprint may follow with a counter offer
* MetroPCS shares rise 17 pct, Leap rises 8 pct, Sprint off 5 pct
(Adds analyst comment share price update)
By Edward Taylor and Nadia Damouni FRANKFURT/NEW YORK, Oct 2 (Reuters) - Deutsche Telekom
is in talks to merge its T-Mobile USA unit with smaller rival MetroPCS , in a move that could pave the way for the German company to eventually exit the U.S. wireless market.
Deutsche Telekom said the discussions revolved around it taking a majority stake in a combined T-Mobile USA and MetroPCS, but it did not give any details of a potential deal structure and cautioned that "significant issues have yet to be finalized."
Two sources familiar with the matter said DT has talked about contributing its T-Mobile USA operations rather than paying cash. In return it would get a stake in MetroPCS, with the option to sell that on the stock market later.
"This is to some extent an exit from the U.S. market for Deutsche Telekom," said Bernstein analyst Craig Moffett, adding that it would be a "graceful way of executing the IPO strategy they've talked about" for T-Mobile USA.
The discussions come less than a year after U.S. antitrust regulators quashed Deutsche Telekom's plan to sell T-Mobile USA, the fourth-largest U.S. mobile service provider, to AT&T Inc , the second-largest, for $39 billion.
Once Deutsche Telekom's strongest growth engine, T-Mobile USA has been losing customers to bigger and smaller rivals in recent years. DT has publicly discussed options such as a public listing, a sale or a partnership for T-Mobile USA at various points in recent years.
MetroPCS confirmed the talks but said it did not intend to comment further unless and until it reaches a deal. MetroPCS, like its rival Leap Wireless , sells wireless services to cost-conscious customers but both have been feeling pressure from larger rivals such as Sprint and T-Mobile USA, which have been targeting the same consumers.
News of the Deutsche Telekom stalks pushed MetroPCS shares up 17 percent, giving the company a market valuation of $4.9 billion.
Leap shares rose 8 percent as investors bet that T-Mobile USA would also end up buying Leap because it has the same network technology as MetroPCS and little geographic overlap.
On the other hand, Sprint Nextel shares fell 5.4 percent as investors worried that it would be left out of the next round of consolidation in the U.S. wireless market unless it makes a counter-offer for MetroPCS.
"There's a game of chess being played between T-Mobile USA and Sprint," Moffett said. "Sprint may have no choice but to jump in. ... The risk is that Sprint loses PCS, Leap and T-Mobile USA all at once," he said.
Sprint Chief Executive Dan Hesse had tried to buy MetroPCS in February, but the company's board balked at the last minute on concerns that a deal would dilute Sprint's stock and complicate its costly network upgrade.
A spokesman for Sprint, the No. 3 U.S. wireless carrier, declined to comment on the MetroPCS news on Tuesday.
Deutsche Telekom cautioned in a regulatory filing that a deal with MetroPCS was not certain and that its board had not yet "taken the resolutions necessary" for a deal.
The deal structure DT and MetroPCS are discussing is known as a reverse initial public offering, which involves a private firm such as T-Mobile USA gaining a listing by acquiring a public company, said two sources who asked not to be named due to a lack of authorization to speak to the media.
Depending on how it is structured, a deal could help Deutsche Telekom preserve cash to support its dividend, which has been a priority for the telephone company.
T-Mobile USA has been struggling to hold onto customers - in the second quarter it lost 205,000 customers. It is also expected to come under more pressure as it does not sell Apple Inc's popular new iPhone which is offered by its bigger rivals, Verizon Wireless, AT&T and Sprint.
The U.S. market has been rife with speculation about the next round of mergers since the failed AT&T/T-Mobile USA deal, which Sprint had loudly opposed. Hesse has since said that he believes the market is in need of consolidation.
Analysts have speculated that Sprint could team up with T-Mobile USA or one of their smaller rivals.
However, "a T-Mobile/PCS combination could make it more difficult for Sprint to merge with that combined entity longer term due to potential antitrust complications," said William Power, an analyst at Robert W. Baird & Co.
That in turn would hinder its ability to gain more scale to compete more effectively with AT&T and Verizon, he added.
If Deutsche Telekom's bid succeeds, several analysts worried that a MetroPCS/T-Mobile combination would be hugely complicated by their use of incompatible network technologies. They are both upgrading to the same high-speed technology but this process will take years, Roe Equity Research analyst Kevin Roe said.
A combined T-Mobile USA and MetroPCS would command 29.5 percent of the market for prepaid wireless services for which customers pay in advance and do not commit to long-term contracts, according to Bernstein's Moffett.
MetroPCS shares closed up $2.05, or 17.8 percent, at $13.57 on the New York Stock Exchange. On Nasdaq, Leap rose 59 cents, or 8.4 percent, to $7.59, while Sprint ended down 28 cents, or 5.4 percent, at $4.90.
(Additional reporting by Arno Schuetze in Frankfurt, Nicola Leske and Sinead Carew in New York and Leila Abboud in Brussels; editing by Elaine Hardcastle, Andrew Hay and Richard Chang)
Keywords: DEUTSCHETELEKOM TMOBILE/