After nearly six years of semi-autonomous trading on the open markets, Sprint Corp. decided last week to rein in its wayward wireless division by folding in Sprint PCS’ tracking stock under the company’s wireline-based FON common stock symbol. Sprint PCS’ stock has been trading freely on the New York Stock Exchange since late 1998, following Sprint’s complete acquisition of the wireless business from TCI, Comcast Corp. and Cox Communications Inc.
As part of the recombination, Sprint PCS shareholders will receive one-half a share of FON stock for every PCS share owned beginning April 23. Further greasing the wheels, Sprint said it would also declare a regular 12.5 cents per share dividend on all outstanding FON shares including those issued through the recombination.
Sprint PCS’ stock was trading at nearly $10 per share last month and has more than doubled over the past several months. Sprint’s FON stock has seen a similar boost, nearly doubling from its 52-week low of $10.22 per share to more than $19 per share.
While the move has been expected for some time (Sprint’s management last month said they expected to make the move sometime this year), industry observers noted the timing of the decision could be a tip-off to Sprint’s future plans.
Some analysts noted that with merger-and-acquisition fever sweeping the telecommunications industry Sprint would be better positioned to fend off a possible take-over attempt of its wireless division by nuzzling it closer to its bosom. The recombination also strengthens Sprint’s overall operations should the company be interested in making an acquisition.
Analysts have noted a number of companies have begun probing the wireless space for a possible partnership or acquisition, including former players MCI and AT&T Corp., as well as non-telecom companies like Disney, Microsoft and America Online, and that Sprint has been one of the most aggressive carriers in selling capacity on its wireless networks as evident in deals with Virgin Mobile USA L.L.C. and Qwest Communications International Inc.
“With the re-integration of the tracking stocks behind it, we believe Sprint is well positioned to take part in the current industry consolidation,” said SG Cowen telecommunications industry analyst Tom Watts.
UBS Warburg noted Sprint’s new $26 billion market capitalization will make it the fourth largest in the domestic telecommunications industry and position it similar to Alltel Corp., which relies on its wireless division for more than half of its total revenues.
“The simplified structure will provide clarity in valuing the firm’s assets while making it easier for the company to participate in M&A transactions as a buyer or seller,” UBS noted.
With Sprint’s active past in merger activity including a deal with MCI WorldCom in 2000 that was scuttled at the last minute due to government concerns, analysts note the company’s current options are diverse.
Watts said he would look favorably upon Sprint attempting to acquire Nextel Communications Inc., which would merge the nation’s fourth- and sixth-largest wireless carriers. A Sprint/Nextel deal would also push the combined company by both Cingular and AWS as the nation’s second-largest carrier, though the pending merger between those two carriers would place a combined Sprint/Nextel to third place behind Cingular/AWS and Verizon Wireless.
An acquisition of Nextel would prove challenging for Sprint as Nextel currently has a larger market capitalization of nearly $30 billion compared with approximately $28 billion for Sprint, and the carriers’ different network technologies could complicate the integration process. Watts noted that Nextel has flirted with a possible CDMA-based next-generation network overlay that would close the technology gap between the two companies.
Sprint also could have options with fellow wireline/wireless operators Verizon Communications Inc., and Alltel, which both use CDMA for their wireless network technology. A combination with Verizon would result in wireless operations serving nearly 60 million subscribers across the country and again position Verizon Wireless as the nation’s largest carrier following the pending Cingular/AWS merger, while a deal with Alltel would result in wireless operations serving nearly 30 million customers.
Analysts have also noted that they expect a second merger between wireless carriers likely would take place shortly after a first deal, citing the government’s possible resistance to having fewer than four nationwide wireless carriers.
Rumors about a possible deal with BellSouth Corp., which was current Sprint head Gary Forsee’s former employer, died down following Cingular’s acquisition of AWS.
Others are not so sure the recombination will have much of an impact, explaining that tracking stocks are not supported by company assets and that if another company was interested in acquiring either Sprint’s wireline or wireless business, it would have had to buy the whole company anyway.
“I don’t think it really changes the possibility of M&A activity,” said N. Moore Capital Ltd. President Jeffrey Hines. “If Sprint was really interested in maximizing the full value of its wireless business it should really be a separate company.”
Hines added that the recombination could help Sprint shield its deteriorating wireline operations, but would not likely affect the company’s overall operations.
American Technology Research telecommunications industry analyst Albert Lin voiced similar misgivings, noting Sprint’s wireline operations likely would slow the company’s wireless division.
“We believe the move to recombine will essentially end the rapid overall company improvement as the mixed results are likely to show much slower growth and see higher competitive pressure,” Lin said. “In our view the company is playing a very defensive move to ensure FON cannot lose PCS as a bundling partner and engine for overall growth.”
