Sprint Corp.’s pending acquisition of Nextel Communications Inc. has become a virtual soap opera, with numerous tit-for-tats that have cropped up ahead of the deal’s expected closing later this quarter. The issues are not expected to thwart the deal’s final outcome, though they could require Sprint to solve matters more quickly than originally anticipated.
Sprint cleared an important hurdle by announcing plans to purchase unhappy affiliate US Unwired Inc. for $1.3 billion. US Unwired, which serves more than 500,000 Sprint customers in nine states covering 8.1 million potential customers, was in the midst of a court case attempting to block Sprint’s acquisition of Nextel, citing the deal’s potential violation of US Unwired’s affiliate agreement. Not to be outdone, iPCS Inc. late Friday filed its own lawsuit against Sprint, citing similar alleged violations as US Unwired’s case.
Under terms of the deal, Sprint said it plans to acquire all of US Unwired’s outstanding common stock for $6.25 per share. US Unwired’s stock was trading up at around $6.20 last week, giving the affiliate a market capitalization of about $1.02 billion.
Sprint noted that after the tender offer, any remaining US Unwired shares would be acquired in a cash merger at the same price, and it would assume US Unwired’s $266 million in net debt. Shareholders controlling about 27.3 percent of US Unwired’s common stock have agreed to tender their shares pursuant to the tender offer and to vote in favor of the acquisition, which is expected to close during the third quarter.
“This acquisition would bring an end to a long partnership with the management and shareholders of US Unwired,” said Gary Forsee, Sprint chairman and chief executive officer. “We appreciate their efforts over the years to grow the Sprint business in its assigned territories. While we decided to acquire a direct ownership interest in these assets, we continue to value our relationship with other affiliates providing Sprint services.”
More importantly for Sprint, the agreement also calls for both parties to seek an immediate stay of litigation pending in the U.S. District Court in US Unwired’s hometown of Lake Charles, La.
US Unwired said in previous court filings that the pending acquisition would irreparably harm the affiliate and violate portions of its 1998 affiliate agreement, which prevents Sprint from offering a competitive service in any of US Unwired’s 11 service areas. US Unwired claims that with the acquisition of Nextel, Sprint would have operations in nine of US Unwired’s service areas.
While Sprint managed to solve its US Unwired problem, affiliate UbiquiTel Inc. filed its own lawsuit to prevent Sprint from competing against the affiliate in its markets following the Nextel acquisition.
UbiquiTel claimed that Sprint’s planned purchase of Nextel will violate its affiliate agreement as the combined operations plan to use Nextel’s existing infrastructure, licenses and network to augment Sprint’s network in UbiquiTel’s service area.
UbiquiTel also said that the Sprint Nextel operations plan to begin selling newly branded Sprint services in former Nextel retail outlets that will be rebranded as Sprint Nextel stores. In support of its claim, UbiquiTel said that during a conference call with its affiliates late last month, Sprint stated its goal was for both Sprint and Nextel to sell both companies’ products and services the first day after the acquisition is complete.
UbiquiTel added that Nextel’s ongoing spectrum relocation process with the Federal Communications Commission would further violate its affiliate agreement. The FCC plan will provide Nextel with 10 megahertz of spectrum in the 1.9 GHz spectrum band in exchange for some of Nextel’s 800 MHz spectrum holdings and nearly $5 billion in cash and related expenses. UbiquiTel said its affiliate agreement prevents Sprint from offering a competing service using the 1.9 GHz spectrum bands in UbiquiTel’s service areas.
UbiquiTel said it is licensed by Sprint to provide services in portions of California, Nevada, Washington, Idaho, Wyoming, Utah, Indiana, Kentucky and Tennessee, serving more than 413,000 Sprint wireless customers.
The UbiquiTel complaint also alleges “tortuous interference” by Nextel in improperly interfering with the affiliate’s exclusive rights under the affiliate agreement. UbiquiTel claims that Nextel was aware that its acquisition by Sprint would violate the affiliate agreement with Sprint, but Nextel “intentionally caused Sprint to execute the merger agreement-a significant factor giving rise to the imminent breach of the management agreement.”
Sprint noted in a Securities and Exchange Commission filing that both Sprint and Nextel plan to defend the allegations.
UbiquiTel said it was seeking a court judgement to force Sprint to comply with the exclusivity provisions of its affiliate agreement and prevent Sprint from disclosing confidential UbiquiTel business information to any person involved in operating or managing Nextel’s business operations in UbiquiTel’s markets; using Nextel’s infrastructure, licenses or network to provide Sprint coverage or sell Sprint products and services in UbiquiTel’s service areas; using the Sprint brand to sell wireless services in UbiquiTel’s service areas; and from owning, operating, building or managing a wireless network using Nextel’s 1.9 GHz spectrum in UbiquiTel’s service areas.
Sprint said in its SEC 8-K filing that it had discussed possible revisions of UbiquiTel’s affiliate agreement ahead of its acquisition of Nextel, and it expected those discussions to continue.
Analysts have predicted Sprint probably would roll up its remaining affiliates in connection with the Nextel deal, citing the potential violation of their affiliate agreements. UbiquiTel has a market capitalization of $850 million, while larger affiliate Alamosa Holdings Inc. is valued at more than $2.5 billion.
Nextel has a similar dilemma with its affiliate Nextel Partners Inc., which began legal proceedings earlier this month in New York, seeking a stay in the Sprint acquisition of Nextel, pending amendments to its affiliate agreement. Nextel Partners’ claims are centered around a recent Sprint branding announcement to use the Sprint name for the combined Sprint Nextel operations and Nextel Partners’ possible use of the name for its own operations.
The Nextel Partners’ issues are not expected to impede Sprint’s acquisition of Nextel as Nextel Partners’ management has said it will encourage its shareholders to vote in favor of the deal and subsequently enact a put option that would force Nextel to acquire the 68 percent of Nextel Partners it does not already own.
Nextel also last week questioned the value of its affiliate in relation to the put option. In an SEC filing, Nextel stated that Nextel Partners’ put option should not be tied directly to Nextel Partners current market price, which has increased more than 40 percent since the deal was announced late last year. Nextel Partners is valued at more than $6.5 billion.
Nextel cited Nextel Partners’ current trading value metrics as being “the highest in the industry by a significant margin” as a reason that the appraisal value “could be lower, and we think should be lower” than its current trading price of $24.50 per share. Nextel noted that its affiliate’s current enterprise value as a multiple of Wall Street 2005 estimates and enterprise value per subscriber is more than twice Nextel’s value despite Nextel generating more operating income before depreciation and amortization per subscriber than Nextel Partners.
Nextel also reported that if Nextel Partners triggers its put option following the closing of Sprint’s acquisition of Nextel, which Nextel Partners’ management has said it will recommend to its shareholders, the process could take at least four months to complete.
Nextel’s argument found little support among some analysts, who continue to feel Nextel Partners’ put rights will garner a substantial premium. “We expect the valuation battle to rage on for awhile, but believe [the] final price, including control premium, will be above current levels,” said Raymond James & Associates telecom industry analyst Ric Prentiss in a research note.
Despite the affiliate cat fights, Sprint and Nextel shareholders threw their support behind the deal, overwhelmingly voting in favor of the acquisition. Sprint reported at least 96 percent of its shares were voted in favor of the deal, while Nextel said it garnered a positive vote from 99.8 percent of its outstanding shares.
The acquisition is still waiting approval from the FCC and Department of Justice. FCC staff members have reportedly recommended approval of the deal, which is expected to close next month.
