Sprint Corp.’s pending acquisition of Nextel Communications Inc. was thrown another curve last week as Nextel affiliate Nextel Partners Inc. sent a notice to Nextel claiming the deal and recently announced branding campaign would violate their current joint-venture agreement signed in early 1999. Nextel Partners also filed for an injunction preventing closure of the acquisition until the claims are resolved.
According to a Securities and Exchange Commission filing, Nextel Partners said it sent a Notice Invoking Alternate Dispute Resolution Process to Nextel, claiming that certain elements of Nextel’s pending acquisition by Sprint will violate obligations under its affiliate agreement. Those violations include Nextel Partners not being able to use the same brand identity as the combined Sprint Nextel, which recently announced the Sprint name would be used to brand the combined Sprint Nextel service and the Nextel brand would be a sub-brand used to market Nextel’s current services to its business customers.
“The changes that Nextel Communications and Sprint recently announced they are planning to make with respect to branding after the close of the Sprint-Nextel Communications merger would violate the joint venture agreement if we cannot use the same brand identity that Nextel Communications will use after the merger, i.e., the Sprint brand,” Nextel Partners claimed.
Nextel Partners also claimed that changes to marketing and national accounts, operational issues, and excluding Nextel Partners from participating in discussions regarding branding and other matters has violated the joint-venture agreement.
“We do not believe that Nextel Communications … have complied with their obligation to permit us to participate in and contribute to discussions regarding a variety of operational matters, including branding, marketing, pricing and national accounts,” Nextel Partners said.
Nextel Partners said that as a result of the violations, it has taken action against Nextel in New York Supreme Court, asking the court to issue an injunction “to preserve the status quo” and prevent Nextel from making any branding changes pending the outcome of Nextel Partners’ dispute with Nextel.
Nextel Partners said its affiliate deal gives it 37 days to try to resolve consensually the issues, after which either party can seek an arbitration to resolve the dispute. “We have been trying, so far unsuccessfully, to resolve these issues consensually with Nextel Communications, so we have asked them to agree to go straight to arbitration,” Nextel Partners added.
Nextel said it was still refining its branding strategy with Sprint, and it expects any decision to be compliant with its affiliate agreement with Nextel Partners. “Nextel Communications and Sprint continue to refine their post-merger branding strategy, and Nextel believes that the post-merger branding strategy will be fully compliant with its agreements with Nextel Partners,” Nextel wrote in an SEC 8-K filing.
Despite the grievances, Nextel Partners said it is not opposed to Sprint’s acquisition of Nextel, and the pending court proceedings would not change the timing of its put option.
“No, we are not seeking to stop the merger,” Nextel Partners explained.
In an SEC filing last month, Nextel Partners’ management said it would encourage shareholders to vote in favor of a put option that would require Nextel to acquire the affiliate for “fair market value” plus a put premium following Sprint’s acquisition of Nextel, which is expected to close during the third quarter. Nextel Partners’ market capitalization has been hovering around the $7 billion mark with analysts predicting the put premium could add another 20 percent.
“The notice of breach and the dispute resolution process are governed by different provisions of our agreements than those that govern the put process,” Nextel Partners noted.
Nextel Partners’ filing did not surprise analysts, who noted the carrier was well within its right in protecting its value ahead of any potential put offering. “I don’t view this as an aggressive move by Nextel Partners,” said Kevin Roe of Roe Equity Research L.L.C. “They are just protecting their value and don’t want anything to harm that value before a put offering.”
Sprint is facing similar challenges from its affiliates that claim their network agreements prevent Sprint from offering a competing wireless service in their markets, including an ongoing court case with disgruntled affiliate US Unwired Inc.
Analysts have said they expect the combined Sprint Nextel eventually to acquire their affiliate partners after Sprint acquires Nextel, though the timing of the rollup could be impacted by the affiliate agreements.
“It’s definitely in Sprint’s and Nextel’s best interests to work closely with their affiliates so as to not harm any of their operations,” Roe added.
