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Sprint Absorbs Nextel: Now Comes the Hard Part

Posted on: Thursday, 16 December 2004, 12:00 CST

The freewheeling wireless industry, known for its upstarts and edgy competition, became a little more uniform on Wednesday when Sprint and Nextel Communications formally announced a $35 billion merger that will create the third-largest U.S. cellphone carrier. The new company, Sprint Nextel, will be a notch below Cingular Wireless and Verizon Wireless in size, with a combined stock market value of about $70 billion, revenue of $40 billion and 39 million subscribers. But that trio will dominate the industry, controlling about three-quarters of the U.S. market. The deal is subject to approval by shareholders and U.S. federal and state regulators, though it is unlikely to face much opposition. The companies may also have to grapple with Verizon Wireless, which is considering whether to make its own bid for Sprint. Even without a rival bid, Sprint and Nextel will have to fend off Verizon Wireless and Cingular, both of which are expected to court their customers aggressively between now and the point when the merger is approved, which could come in the second half of 2005. Regardless, Sprint and Nextel are optimistic that their size, technology and marketing power will make them a strong counter-lever to their larger rivals, both of which are owned by powerful Bell operating companies. They also hope to court the cable industry, which is considering whether and how to offer a wireless service. "This is about one plus one equaling much more than two," said Sprint's chairman, Gary Forsee, who will become chief executive of the new company. Nextel's chief executive, Timothy Donahue, will become the new company's chairman. The deal has been anticipated by Wall Street. Sprint's shares slipped $1.08 to $24.02 on the New York Stock Exchange, while Nextel's shares dropped $1.29 to $28.70 in Nasdaq trading.

The companies described the deal as a merger of equals, but Sprint is in essence acquiring Nextel. Under the terms of the deal, Sprint shareholders would retain their shares, while Nextel shareholders would get about 1.3 shares in the combined company for each of their shares, as well as a small amount of cash. At current rates each Nextel share would be exchanged for 1.28 Sprint Nextel shares and 50 cents in cash. The exact breakdown for Nextel shareholders will be determined later, but the cash payment will not exceed $2.8 billion, the statement said. The company will have its executive headquarters in Reston, Virginia, where Nextel is now located, and its operational base in Overland Park, Kansas, home to Sprint. The companies also plan to spin off Sprint's local phone line business. They are also working with Motorola to develop a phone that will work on Sprint and Nextel's networks, which use different technology. By leaving the traditional phone business, the companies are acknowledging what many in the industry have understood for years: The future of telecommunications is in wireless services and high-speed data connections. "In abandoning their land lines, this gives the household seal of approval that wire lines are dead," said Richard Nespola, chairman of the Management Network Group, a telecommunications consulting firm.

Sprint, however, will retain its long-haul networks that ferry data and voice calls across the country. This network is also used to provide services to other phone and cable companies. Some analysts said Sprint and Nextel would be hard-pressed to match the firepower of the Bells and their wireless carriers. The telecommunications industry is increasingly being defined by bundles of services fixed phone lines, high-speed data connections, wireless services and video products. Cingular, owned by SBC Communications and BellSouth, and Verizon Wireless, owned by Verizon Communications and Vodafone, have been selling cellular service to customers who also buy local and long-distance phone service and broadband connections. Sprint has only recently announced plans to build a high-speed network that would let consumers send and receive e-mail messages and other data services with their cellphones. Verizon Wireless, by contrast, has offered that service for a year. Cingular also offers a data service, though it is more limited than the Verizon Wireless service. Without such a service, Sprint and Nextel risk losing high-paying business customers. Business customers are also big users of international phone plans. Cingular, which uses the same network technology as many wireless carriers in Europe and Asia, has several popular international phone plans. Sprint and Nextel use less common technology, making it harder to use their phones overseas.

Source: International Herald Tribune

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