Less than two months after Cingular Wireless L.L.C. garnered governmental approval for its $41 billion acquisition of AT&T Wireless Services Inc., creating the nation’s largest wireless operator, the wireless industry was aflutter last week following published reports that another big deal was in the works between No. 3 Sprint Corp. and No. 5 Nextel Communications Inc.
Reports late last week citing sources on both sides indicated the companies had reached a tentative agreement on an all-stock deal with Sprint paying around 1.3 shares for each Nextel share plus a small cash consideration that would value the deal at more than $36 billion. Sprint Chief Executive Officer Gary Forsee would become CEO of the new operation with current Nextel CEO Tim Donahue assuming the chairman position. Both companies would also share board positions.
Analysts noted that Nextel, which is the last remaining independent nationwide wireless operator, would have the most to gain from the deal and would thus likely have to cede final ownership to Sprint for a deal to be completed.
Neither Sprint nor Nextel would comment on the report, though reports indicated that the deal could be announced as early as this week.
“Like everybody else, we do continue to evaluate our strategic opportunities,” said Sprint Chief Financial Officer Bob Dellinger at a Credit Suisse First Boston conference last week. “That’s appropriate for all businesses, and we continue to do that.”
SG Cowen & Co. telecommunications industry analyst Tom Watts, who has been speculating on a possible deal between Sprint and Nextel since earlier this year, put the possibility of an agreement being reached at more than 70 percent.
One source noted rumors of the deal could have been a test balloon sent up by both companies to gauge investor reaction or a move by Nextel to place pressure on other industry players to begin merger talks. Sprint’s stock was up more than 8 percent last Thursday following the report, while Nextel’s stock increased more than 6 percent.
Standard & Poor’s Equity Research reiterated its “strong buy” on Nextel’s shares, noting a combination with Sprint would provide an even stronger leadership position in the wireless business market. Nextel is a strong player in the business market led by its Direct Connect walkie-talkie service, while Sprint has recently reorganized its business operations to provide a better focus on lucrative business customers.
Others explained that Verizon Wireless is seen as a less likely candidate for a deal with Nextel since the operator is already experiencing industry-leading customer growth and would not want to distract that momentum, as well as an increased chance of government intervention due to Verizon Wireless’ considerable size.
A deal between Sprint and Nextel would also impact T-Mobile USA Inc., which would fall further behind its larger competitors in market share among nationwide operators. Analysts note that T-Mobile USA, which is the fourth-largest operator with more than 16 million subscribers and owned by German telecommunications giant Deutsche Telekom AG, could focus its attention on acquiring regional operators like Triton PCS Holdings Inc. to boost its customer base or look at linking up with a wireline provider to increase its growth opportunities.
Industry analysts have speculated about a possible combination between Sprint and Nextel for some time, noting such a deal would create a third “mega-carrier” with more than 31 million subscribers that could compete more effectively against the recently strengthened Cingular and No. 2 Verizon Wireless. Merrill Lynch noted the combined operations would control approximately 49 megahertz of spectrum in the nation’s top 50 markets, which is below the 70 megahertz “soft-cap” hinted to by the Federal Communications Commission in approving Cingular’s acquisition of AWS, and that unlike Verizon Wireless and Cingular would not have to support analog users.
Many people also have noted that following Cingular’s acquisition of AWS, government regulators would likely approve only one additional merger between the country’s nationwide operators, which would bring the number of large carriers down from six to four. While a merger between Sprint and Nextel could require some specific divestitures in select markets, analysts did not think they would be enough to squash a possible deal.
“We believe that the government would permit a Nextel-Sprint merger,” noted Legg Mason Wood Walker in a research report. “The [Department of Justice] and/or FCC would likely require divestitures of operations in certain local markets, particularly where Sprint is the local incumbent.”
Further fueling merger rumors is Nextel’s pending decision on its next-generation technology path. Analysts noted that if Nextel decides to install a CDMA-based network using the 1.9 GHz spectrum it’s likely to acquire from the FCC as part of a re-banding effort designed to reduce interference in the 800 MHz spectrum band, Nextel could set itself up for a possible deal with either Sprint or Verizon Wireless.
On the other hand, analysts noted that if Nextel decides to implement a non-traditional technology similar to Flarion Technologies’ Flash-OFDM system, which Nextel has installed in parts of North Carolina, the carrier could be readying to remain a standalone entity.
Another potential tie-in between Nextel and Sprint is that both companies control significant spectrum holdings in the 2.5 GHz spectrum band, which both carriers have previously said they could use for next-generation services. Analysts note that the government has recently ruled that companies could use the so-called MMDS spectrum for mobile and wireless broadband services, which could provide another avenue for deployment of Flarion’s Flash-OFDM technology.
Both companies could also take advantage of advancements being made by Qualcomm Inc. in launching CDMA-based push-to-talk services to integrate their divergent PTT offerings. Nextel signed a deal with Qualcomm in 2002 to help develop Qualcomm’s Q-Chat service for deployment in markets outside of the United States that could be tweaked to be interoperable with Nextel’s iDEN-based Direct Connect offering.
Beyond the possible divestiture of spectrum to satisfy government regulators, analysts noted both Sprint and Nextel would have to address affiliate arrangements. Sprint currently has several network affiliates that license the carrier’s spectrum in second- and third-tier markets, while Nextel Partners Inc. serves a similar role for Nextel, though Nextel Partners owns the spectrum it uses.
Nextel Partners has a put option with Nextel that would force Nextel to buy its network partner if a change of ownership were to occur at Nextel, which analysts note could cost Nextel more than $5 billion. Sprint is under no obligation to acquire its affiliates, though many industry observers predict they would be absorbed by a combined Sprint/Nextel eventually.
