Sprint's $35 billion bid to acquire Nextel challenges opponents
Thursday, December 16, 2004
NEW YORK -- Sprint Corp.'s $35 billion acquisition of Nextel Communications Inc. could challenge Cingular Wireless and Verizon Wireless for supremacy in a ruthlessly competitive business where prices are constantly dropping.
The combination, if approved, would create a company called Sprint Nextel with 35 million wireless subscribers and a combined $40 billion in annual revenue, cementing Sprint's spot as the country's third largest wireless business after Cingular and Verizon.
To succeed, the combined company must iron out vast differences in culture and technology. Once that's done, consumers could benefit from even lower wireless prices, analysts say. The downside: job cuts are likely and Nextel's customer's would eventually have to buy new phones.
The first challenge is that "Nextel's rough-and-tumble roots as an entrepreneurial taxi radio-dispatch business may not jibe with Sprint's button-down persona," CIBC World Markets analyst Timothy Horan wrote in a research note.
No problem, said Timothy Donahue, 55, president and chief executive officer of Nextel, who will be chairman of the combined company.
He said he and Gary D. Forsee, 53, the chairman and chief executive officer of Sprint, who will be the new company's CEO, will work side by side.
"He's a good guy," said Donahue. "I'll also enjoy playing golf with him and having dinner with him."
If the personality differences may be quickly resolved, meshing the two companies' technology will be more complex -- and expensive -- since their networks and handsets are worlds apart.
More than any other U.S. cell phone company, Sprint has invested heavily in developing multimedia capabilities such as text and photo messaging, even offering a premium TV service that allows customers to watch everything from baseball games to news on their phones. It has partnered with handset companies including Samsung Corp. that make phones with vast data storage and fast chips.
Nextel phones, by contrast, are relatively low-tech. Produced exclusively by Motorola Inc., they feature a push-to-talk walkie-talkie function popular with landscapers and contractors. The phones run on a different type of network than Sprint's.
Nextel would have had to eventually switch to different frequencies, anyway, so its calls don't interfere with emergency radios. The company had planned to spend $2 billion to $3 billion to convert its network; the merger will spare it the cost of making the switch solo.
Eventually, all Nextel customers will have to switch to Sprint's network. They will be able to keep their phones for the time being, but anyone who wants the best of both companies will have to buy a new type of phone that isn't expected to be for sale until the end of 2006.
The phone, to be made only by Motorola initially, will have both companies' signature features: Nextel's push-to-talk function, and Sprint's ability to handle data-rich tasks.
Even though a deal means the three largest wireless companies will carry 75 percent of all voice traffic, analysts say prices for wireless calls should continue to drop.
The average monthly bill for local wireless service dropped from $61.49 in December 1993 to $49.49 by June 2004, according to the Cellular Telecommunications & Internet Association, an industry group.
"Sprint has always been pretty aggressive on wireless services prices, both business and consumer," said Forrester Research analyst Lisa Pierce. "I don't expect it to reverse course."
The market punished both stocks in trading Wednesday, pushing Sprint's price down $1.08, or 4 percent, to $24.02 on the New York Stock Exchange and Nextel's shares down 57 cents, or 3 percent, to $18.69 on the Nasdaq.
The two companies stressed the deal's upsides: Sprint would get access to Nextel's 15.3 million subscribers, many of whom are business customers who are more profitable than Sprint's base of consumers. The companies also estimate the merger would save them $12 billion in operating costs and network upgrades.
The merger would also put the new company in a better position than either is individually to partner with cable providers as the cable companies push to offer phone service. Analysts expect customers to increasingly demand a package of services that combines Internet access, a home phone and wireless service.
Sprint Nextel will have its executive headquarters in Reston, Va., where Nextel is now based and its operational headquarters in Overland Park, Kan., where Sprint has its headquarters.
The deal has a break-up fee of roughly $1 billion, executives said. That means if Sprint is bought by another company and jilts Nextel, Sprint would pay the fee to Nextel. Likewise, if Nextel is bought by a company other than Sprint, it would have to pay the fee to Sprint.
The Wall Street Journal reported Tuesday that Verizon Communications Inc. was interested in merging Sprint with the wireless service it runs as a joint venture with Vodafone Group PLC.
Vodafone denied it had discussed the matter with Verizon, but investors haven't counted Verizon out. Its stock fell 34 cents to $40.70 a share and Vodafone's stock rose 19 cents to $27.54 a share. Both trade on the New York Stock Exchange.
After completion of the deal, which the companies described as a merger of equals, Sprint's local telecommunications business would be spun off to the combined firm's shareholders in a separate stock that could pay high dividends, analyst said. The local telecom business accounted for about $6 billion of their combined revenues.
Under terms of the deal, Sprint shareholders would get one share of the new company for each Sprint share while Nextel shareholders would get the equivalent of 1.3 Sprint Nextel shares for each of their shares, a small amount of that sum paid in cash.
At Wednesday's 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 won't exceed $2.8 billion.
The company expects the local business to have roughly 22,000 employees and the combined wireless company to have about 55,000 employees.
While these numbers match existing employee totals for both companies, executives said Wednesday jobs would be cut.
"At the end of the day, it will be about rationalizing and downsizing," said Forsee.