Sprint, Nextel to merge into wireless giant

Planned union to create third-largest U.S. carrier

Further consolidates industry

FCC vote ends cheap fees to use land-line networks

December 16, 2004|By Tricia Bishop | Tricia Bishop,SUN STAFF

Two developments yesterday will likely have a major impact on the continued shift from land-line to wireless telephones: The $71 billion merger of Sprint Corp. and Nextel Communications Inc. into the third-largest wireless carrier and federal regulators' vote to free the four big regional Bells from having to cheaply lease their networks to competitors.

The creation of Sprint Nextel, which will be based in Reston, Va., will further consolidate the wireless phone industry. Pending federal approval, the new company would follow Cingular, which two months ago completed a merger with AT&T Wireless Services Inc., and Verizon Wireless. Analysts said the moves could squeeze the fourth-largest carrier, T-Mobile.

Meanwhile, the Federal Communications Commission voted 3-2 yesterday to allow the four major regional land-line phone companies - Verizon Communications Inc., SBC Communications Inc., Qwest Communications International Inc. and BellSouth Corp. - to phase out the wholesaling of their networks to competitors in the nation's large markets. That was required under the 1996 telephone reform act that ushered in the recent era of phone choice and competition.

Some consumer advocates and others predicted higher phone bills for millions of residential phone customers of AT&T Corp., MCI Inc. and other carriers that piggyback on the Bell lines. Those companies have a year to build their own networks or negotiate new - and presumably more costly - leases.

"The irony is that today, [the FCC] killed competition over the telephone wires, and the only hope was for wireless," said Mark Cooper, director of research at the Consumer Federation of America. If the federal government approves the Sprint Nextel merger, as expected, Cooper said that would chill competition in wireless as well.

"Compared to the last one, they haven't got a chance to say no," Cooper said, referring to the approval of Cingular's acquisition of AT&T Wireless. "This one was a done deal the minute the ink dried."

Others, however, took a positive outlook on the Sprint Nextel news. The consolidation trend in wireless service - as well as in other industries - might consolidate the United States under a single wireless technology, as in Europe, and spur innovation under a few companies with ample capital and stability, some analysts said.

The industry shake-up reflects the huge shift that has transformed phone use in recent years. About 70 percent of Americans have cell phones, compared with about 40 percent four years ago. Wireless connections outnumber land lines. About 15 percent of wireless users consider the connection their primary communication tool and nearly 10 percent of users have given up their land-line telephones.

Cingular has about 46 million wireless customers in the United States, followed closely by Verizon with about 42 million. Sprint, Nextel and T-Mobile followed, each with about 17 million customers, before this deal.

The Sprint Nextel combination may seem an odd pairing. Sprint focuses on a consumer base, while Nextel's walkie-talkie technology has been popular with business users. But the companies, and industry analysts, said those differences should help the match.

"This is like a jigsaw [puzzle], and this is a case where the pieces actually fit together rather well," said Ken Hyers, a wireless data services analyst with technology research firm In-Stat/MDR.

The combined company will house its executive headquarters in Reston, where Nextel is currently based, and keep operation headquarters in Sprint's hometown of Overland Park, Kan. The mostly stock deal will take about a year to complete if approved.

Equally matched

Sprint and Nextel were each valued the same - at about $35 billion apiece. Sprint shareholders will keep their stock as is, and Nextel holders will get 1.3 shares of the new company for each share they own, plus about 50 cents a share.

Both companies' shares closed down 4 percent yesterday. Nextel dropped $1.29 to $28.70. Sprint fell $1.08 to $24.02.

Sprint initiated the merger to survive among the big two and "create a player that has the scale and size able to effectively compete," spokesman Bill White said. Putting the two companies together will make a "formidable competitor to the Bell companies."

One reason the deal was attractive to Nextel was Sprint's plan to roll out so-called third-generation broadband wireless technology, known as "3G." All the major wireless carriers, except T-Mobile, are expected to deliver the service in the country's 50 major markets, including Baltimore and Washington, by the end of next year. Without the merger, Nextel would have been left behind.

A spokesman for T-Mobile said the company had no timeline for its 3G technology, but analysts have estimated it will take about two years.

"The bottom line is that T-Mobile USA continues to go full steam ahead in executing its strategy," said spokesman Peter Dobrow, pointing out that the company is part of a global network with 67 million subscribers.

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