The rumor mill kicked into high gear last week with published reports claiming a handful of domestic and international wireless carriers are targeting AT&T Wireless Services Inc. as a possible merger partner.
The reports began with claims that Cingular Wireless L.L.C. had rekindled its often-rumored talks with AT&T Wireless and that the companies could announce a possible deal as soon as the end of the month. A merger between the nation’s second- and third-largest wireless carriers has been rumor fodder since early last year, fueled by remarks by Cingular’s parent companies SBC Communications Inc. and BellSouth Corp. that they want a larger presence in the wireless space.
Cingular, which possesses one of the weakest spectrum positions of the six nationwide carriers, previously had been linked with T-Mobile USA Inc. before Deutsche Telekom AG said it wanted to keep its U.S. presence. Cingular also is in the midst of acquiring spectrum from bankrupt PCS carrier NextWave Telecom Inc.
RBC Capital Markets noted that an acquisition of AT&T Wireless would give Cingular a presence in a number of markets where it currently lacks spectrum, including Denver, Phoenix and Minneapolis, while Legg Mason reported a combined company would have at least 30 megahertz of spectrum in 99 of the country’s top 100 markets, at least 35 megahertz in 90 of the top 100, and at least 40 megahertz in 80 of the top 100.
In addition to spectrum gains, an acquisition of AT&T Wireless by Cingular would elevate the carrier past Verizon Wireless as the nation’s largest wireless carrier with nearly 45 million subscribers compared with Verizon Wireless’ 35 million customers.
Following the Cingular-AT&T Wireless rumor, another published report claimed Japanese telecommunications giant and current AT&T Wireless minority-interest partner NTT DoCoMo Inc. as well as Nextel Communications Inc. had also approached AT&T Wireless about a possible acquisition or merger.
Analysts questioned DoCoMo’s intent, noting the carrier likely would benefit more from maintaining its wireless data-centric relationship with AT&T Wireless, while others noted AT&T Wireless’ nearly $30 billion market capitalization would stretch Nextel’s increasingly positive financial position too thin.
Reports also claimed that Vodafone Group plc, which currently owns 45 percent of Verizon Wireless, is expected to explore a possible merger deal with AT&T Wireless, despite repeated public claims by Vodafone’s management that it is happy with its current stake in CDMA carrier Verizon Wireless. A number of industry analysts have brushed aside Vodafone’s report of happiness in owning a minority of Verizon Wireless, noting the complete ownership of a GSM-based carrier like AT&T Wireless would match Vodafone’s international plans more closely.
T-Mobile USA was also rumored to be involved in talks with AT&T Wireless, which analysts noted was most likely linked to the fact it would have few merger possibilities if Cingular and AT&T Wireless strike a deal and few opportunities to grow beyond its position as the smallest of the nationwide carriers.
While none of the carriers involved commented on the merger rumors, investors worked themselves into a frenzy as AT&T Wireless’ stock was up as much as 25 percent last week, setting a new 52-week high of $10.17 per share. AT&T Wireless affiliate Triton PCS Holdings Inc. also saw its stock jump following the merger rumors as the regional operator’s marketing and roaming rights with AT&T Wireless were expected to be included in any merger deal.
Beyond investor enthusiasm for a possible merger, analysts were more concerned about the possibility of government agencies approving an acquisition of one of the country’s largest wireless carriers, noting a purchase by a domestic carrier likely would be approved by the Federal Communications Commission and the Department of Justice, with a possible international suitor garnering a closer look from the DoJ.
FCC Chairman Michael Powell refused to say last week whether the FCC would allow Cingular to buy AT&T Wireless, but hinted he would look beyond previous commission policy that frowned on consolidation among companies with large wireless and wireline holdings.
“You cannot responsibly pronounce them thinkable or unthinkable without having even seen the constructs of the deal,” Powell said at a meeting at the National Press Club.
RBC Capital Markets noted it sees fewer “compelling industry-strategic reasons now for a merger than during prior discussions” due to the improving financial picture of many carriers, but it expects a potential deal between Cingular and AT&T Wireless would be approved.
“The key factor is DOJ authorization, which we believe would hinge largely on whether the merged entity possesses inordinate pricing power,” RBC said in a report. “We believe a six-player industry consolidating into five players would not result in such pricing power, despite a potentially large market share by [AT&T Wireless and Cingular] in select markets.”
Legg Mason also predicted government approval of a deal between Cingular and AT&T Wireless, but cautioned that approval could come with the risk of possible local divestitures to complete.
Analysts also voiced concern over government attitude toward any additional consolidation possibilities that would be expected to quickly follow a first announcement, noting the FCC or DoJ would likely not allow more than two deals that resulted in less than four nationwide carriers.
“We believe an [AT&T Wireless/Cingular] combination would increase/accelerate the possibility of a second merger announcement in the near-term since operators contemplating a combination would not want to be left out of the action,” RBC said, adding any further consolidation would likely occur along technology lines.
