Sprint Corp. and Nextel Communications Inc. are in discussions about a potential merger that would top $30 billion and rapidly accelerate the consolidation of the nation's wireless industry, according to people familiar with the situation.
Such a deal would create the nation's third-largest cellphone operator with about 38.5 million customers, narrowing the U.S. cellular industry into a business dominated by three giants. Cingular Wireless, Verizon Wireless and a combined Sprint-Nextel would control about 75% of the market, though a host of other entrants also compete. The talks come just six weeks after Cingular became the country's largest cellphone operator, following its completed acquisition of AT&T Wireless Services Inc.
Discussions between Sprint and Nextel are ongoing, these people say. There's no certainty a deal is completed, they add, and like all discussions they could fall apart over issues both large and small. Verizon Wireless could also enter the fray. The country's second biggest wireless operator uses the same cellular technology as Sprint, and has long had a sporadic interest in the carrier.
'Push to Talk'
Nextel, the smallest of the country's national wireless carriers, has emerged as the most profitable with its unique "push to talk" service that essentially turns cellphones into walkie-talkies. Nextel is trying to widen its reach by sponsoring Nascar auto races and is moving into the youth market with its Boost brand.
The carrier has two big problems, and a deal with Sprint would help solve them: It needs more radio-wave spectrum, the valuable airwaves that cellular operators use to transmit calls. And it needs to switch to an entirely new network technology to keep up with competitors offering services like high-speed Web browsing.
For Sprint, which has been stuck in the middle of the wireless pack, the deal would make it nearly as large as its bigger wireless competitors, lowering its costs as it embarks on a multibillion-dollar plan to upgrade its own network.
The combination would also further underscore the fact that wireless has become the future of communications. Already, 172 million people in the U.S. have wireless phones. An intense race has begun to offer them Web access, music, e-mail and photos.
Representatives from Sprint and Nextel declined to comment yesterday, but the stock and bond markets appeared to approve of the potential deal, which will almost definitely be an all-stock transaction. Yesterday, shares in Sprint and Nextel traded in high volumes after The Wall Street Journal reported merger speculation. As of 4 p.m., Nextel shares rose $1.84, or 6.6%, to $29.81 on the Nasdaq Stock Market. Sprint shares rose $1.78, or nearly 8%, to $24.28 as of 4 p.m. in New York Stock Exchange composite trading.
The two have almost equal market valuations of about $31 billion, and the deal is being negotiated as a merger of equals. Of course, in more than a few mergers, the meaning of "equals" has been known to develop an unusual flexibility not long after the ink has dried on the contract.
Enterprise Value
Sprint's so-called enterprise value -- its market cap plus its debt -- is $53 billion, far higher than Nextel's $42 billion. Sprint also has higher revenue, $27 billion during the past 12 months, compared with $13 billion for Nextel. But nearly half of Sprint's revenue comes from the shrinking long-distance and local land-line business. Overall, Nextel is the more profitable company.
The two sides have largely worked out management-control issues between them, say people familiar with the matter, including an agreement on who would run the combined company. Sprint, of Overland Park, Kan., has more than three times as many employees as Nextel, of Reston, Va. Timothy Donahue, Nextel's chief executive, and Gary Forsee, Sprint's CEO, are nearly the same age, 56 and 54. Analysts say Mr. Donahue, who has run Nextel for more than five years, is more likely to yield the helm to Mr. Forsee, who assumed the top spot at Sprint only last year after leaving a high-ranking job at BellSouth Corp.
Despite the explosion in cellular calling in the U.S., consumers still give low marks to cellphone service, with complaints about everything from network coverage to sound quality to complicated bills. Some consumer advocates worry that the deal could take pressure off the hypercompetitive wireless industry, potentially leading to more expensive calling plans and less pressure to improve service.
"This is the signal of an ongoing trend to reduce competition," says Gene Kimmelman of Consumer's Union, Washington.
A deal would have its risks. Nextel's 15.3 million customers would likely need new handsets if the new company wants them all to be served by Sprint's CDMA (code division multiple access) technology. Plus, Nextel's push-to-talk service is somewhat unproven with CDMA.
People familiar with the negotiations say that both companies have been discussing ways to bridge the technology gaps. "They wouldn't put them together without a plan," said a person close to the negotiations. There could well be significant layoffs as a result of the merger as the companies look to cut costs. Combined, the companies would have about 77,000 employees.
The merger could affect other players. T-Mobile USA Inc., a unit of Deutsche Telekom AG and currently the fourth-biggest cellular carrier in the U.S., would become a more distant fourth, with 16.3 million customers. But Robert Dotson, T-Mobile USA's chief executive, said in an interview that he isn't worried about that since, internationally, T-Mobile has 67 million cellular subscribers.
Motorola Inc., the Schaumburg, Ill., telecom-equipment maker, is Nextel's sole equipment supplier, and the handsets it makes for Nextel are its most profitable. A Nextel merger with Sprint could end that exclusivity. A potential winner of the combination would be Qualcomm Inc., which licenses and makes chips using the CDMA technology used by Sprint.
For Sprint, a deal would give it a key presence in the market for business customers. That could also help its shrinking long-distance business, which has long lagged behind AT&T Corp. and MCI Inc. If it keeps that long-distance business intact, it could use Nextel's subscribers as a way to prop it up. Sprint has lately heavily relied on wholesale deals with other companies that have allowed carriers such as Virgin Mobile USA LLC into the wireless business. But these deals have translated into lower-revenue customers for Sprint.
Both Nextel and Sprint have been down the merger path before -- many times with different partners. In 2000, regulators torpedoed a proposed $117 billion merger between Sprint and MCI, which was then known as WorldCom Inc.
The failed merger left Sprint somewhat adrift as a distant third player against larger rivals in long-distance. William Esrey, its longtime chairman and chief executive, was forced out last year over his use of tax shelters. Sprint's very structure has been in flux in recent years as it first created a tracking stock for its wireless business, then earlier this year recombined the stocks.
Nextel had its own dalliances with WorldCom. More recently, Nextel has had talks with AT&T Wireless, first in 2000 and then earlier this year.
For Nextel, a meld with Sprint would represent a surprising culmination of a 30-month roller-coaster ride. In mid-2002, many investors and analysts thought the company had no future. It was carrying a crushing debt load and was on the verge of new competition in its push-to-talk business. Since then, it has cut its debt in half, and the new competition has seemed to have little impact.
It's unclear what would happen to Sprint's local and long-distance businesses, which still make up close to half of the company's annual revenue. Several analysts have speculated that the carrier would want to spin them off, becoming the country's biggest pure-play wireless carrier. However, Sprint has been gradually integrating the three parts of its business, which could make such a spinoff more complicated.
To be sure, if Sprint wants to spin off any part of its traditional landline operations, it could complicate a deal. In a report issued yesterday, Goldman Sachs analyst Jason Armstrong said it could take two years before a combined company could spin off assets without paying taxes.
From a regulatory standpoint, there aren't obvious road blocks that would prevent the deal from getting approval by antitrust officials as well as the Federal Communications Commission, industry officials and attorneys said. The FCC and the Justice Department just approved the $41 billion combination of two larger companies, Cingular and AT&T Wireless. Sprint and Nextel would likely argue that a strong third party is necessary to keep up competitive pressure, industry attorneys said.
Cingular, a joint venture of SBC Communications Inc. and BellSouth, is now the country's largest cellular operator, with about 47 million subscribers. Verizon Wireless, a joint venture of Verizon Communications Inc. and Vodafone Group PLC, is second with about 42 million customers.
Nextel recently got FCC approval to swap some new spectrum for old to avoid interference with public-safety radios, and the new spectrum should help bolster its network.
---- Anne Marie Squeo and Shawn Young contributed to this article.
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Does a merger between Nextel Communications Inc. and Sprint Corp. make sense?
The possibility of a combination of the U.S.'s fifth-largest wireless carrier and the third-largest, respectively, is gaining increasing buzz around Wall Street and telecommunications executives. One reason: Nextel's pending $2 billion to $3 billion decision on an upgrade of its entire network, which requires choosing which all-new technology it will use. It is expected to make an announcement on the upgrade as early as next month.
Sprint already uses one of the technologies that Nextel is considering, called CDMA. Such a combination would give Nextel access to much-needed radio-wave spectrum, the valuable airwaves cellular companies use to transmit wireless phone calls.
More broadly, a deal would create a large and potent megacarrier to challenge Cingular Wireless and Verizon Wireless, the nation's first- and second-largest cellular-telephone operators.
A combined Sprint-Nextel would have roughly 38.5 million subscribers, compared with Cingular's 47 million and Verizon Wireless's 42 million. Cingular is a joint venture of SBC Communications Inc. and BellSouth Corp. Verizon is a joint venture of Verizon Communications Inc. and Vodafone Group PLC.
Speculation has swirled for years around Nextel and Sprint, which each has a market value of more than $30 billion. But the discussion about a pairing-up has kicked into a higher gear in the past few days.
While both companies declined to comment yesterday, Nextel has clearly shown its ambitions for getting larger.
Earlier this year, it had serious discussions about acquiring the much larger AT&T Wireless Services Inc., which was eventually purchased by Cingular.
Indeed, in the wake of the Cingular-AT&T Wireless deal, Nextel executives discussed a plan to make a bid for Sprint, according to a person familiar with the matter. That was never done.
For Sprint, such a deal would instantly put it nearly on par with Cingular and Verizon Wireless. It also would give it access to Nextel's highly desirable business-customer base, which has given the Reston, Va., firm the highest average customer revenue in the U.S. wireless industry.
It isn't clear what a deal would mean for Sprint's shrinking long-distance and local businesses, which still make up nearly half the company's revenue.
One scenario suggested by a Wall Street banker is that Sprint would spin off its traditional land-line businesses, enabling the resulting Nextel-Sprint to be valued as a giant pure-play wireless company, instantly becoming the envy of the telecom industry.
Another big wireless deal is doable "as long as it's not Verizon or Cingular," said Andrew Lipman, partner at Swidler Berlin, a major telecommunications firm in Washington. "It's certainly within the realm of the possible, particularly with a Republican attorney general."
One question would be what happens to Nextel's key "push-to-talk" service. That walkie-talkie offering has been the key to the carrier's success and other operators have tried to copy it, offering similar services.
But making it work smoothly using CDMA technology is unproved. Nextel has an agreement with Qualcomm Inc. to make that service work using CDMA, but Nextel hasn't yet deployed the service commercially. (Verizon Wireless and Sprint both offer a similar push-to-talk service using CDMA, but they are considered inferior to Nextel's product.)
Nextel also is conducting trials of a new network technology called Flash-OFDM, made by Flarion Technologies Inc.
Whichever technology the carrier chooses, Nextel Chief Executive Timothy Donahue said last month that the new network would cost between $2 billion and $3 billion.
However, one of Nextel's motivations for a deal with AT&T Wireless or Sprint may have faded. Nextel desperately needs more radio-wave spectrum to accommodate more customers, as well as higher-speed data services, such as fast wireless Internet browsing, which can't be easily served by its current technology, called iDEN. But a decision by the Federal Communications Commission earlier this year -- to clear up interference with public-safety radios -- is likely to grant Nextel much better spectrum holdings and could make a deal less urgent.
A deal would be roughly a merger of equals: Nextel has a market capitalization of about $31.1 billion and its stock has been on a tear.
In mid-2002, its shares traded below $3, burdened by the carrier's high debt levels and uneven spectrum holdings. Nextel has since cut its debt significantly and its share price has risen roughly tenfold.
Shares of the carrier, which have traded up steadily for the past two months, were at $27.97 as of 4 p.m. in Nasdaq Stock Market trading yesterday, down 18 cents for the session.
Sprint's market value is $33 billion. Its shares, which have also risen steadily since mid-September, were at $22.50, down 34 cents, as of 4 p.m. in New York Stock Exchange composite trading.
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