Merger not expected to change much

Sprint and Nextel last month announced plans for a $35 billion merger, but the combination will not cause Nextel’s enterprise users to lose the valued push-to-talk capability that has driven the wireless carrier’s subscriber growth and customer loyalty, particularly in the government and public-safety sectors.

Depicted as a merger of equals, the deal is expected to generate $12 billion in synergies between two wireless carriers that reportedly boast the highest average revenue per user (ARPU) in the wireless industry. The new company, to be known as Sprint Nextel, will have 36 million customers, giving it the kind of scale most analysts believe is necessary to compete effectively against Cingular Wireless and Verizon Wireless, the two largest mobile carriers.

One of the greatest cost savings associated with the deal is that the merged Sprint Nextel will have to build only one 3G network to provide advanced wireless services and will have enough scale to negotiate favorable terms with vendors for the project. While the long-term future of Sprint Nextel will rely on this new CDMA EV-DO network, the next several years will see the merged company continue to maintain both Sprint’s CDMA network and Nextel’s iDEN network.

In fact, the merged company plans to continue investment in the iDEN network at least through 2007 as it works to develop push-to-talk technology over the CDMA network.

“I think the iDEN network has a very long life,” Nextel President and CEO Tim Donahue said during the Dec. 15, 2004, press conference announcing the merger. “It is my hope and expectation that we can extend the life of iDEN by offering services to public safety, government and push-to-talk-centric businesses who can take advantage of this great network that’s already built.”

Although Sprint Nextel will continue to use two networks during the next few years, the combination will let the merged company enjoy other synergies more quickly. In particular, Sprint’s wireline long-distance and data assets can be packaged with Nextel’s push-to-talk capability to make a compelling bundle in the enterprise market.

In addition, Sprint Nextel will easily be the largest wireless company not owned by an RBOC such as BellSouth, SBC Communications or Verizon Communications, which are offering bundled services in a fierce battle with cable companies. Given this, Sprint Nextel is a logical partner to give cable operators a mobile component to their bundles, especially because Sprint already is working with multiple service operators to provide long-distance and has wireless wholesale arrangements with ESPN, Virgin and Qwest Communications.

“This is about one plus one equaling much more than two,” said Gary Forsee, Sprint Chairman and CEO. “We have drawn into a perfect hand for a telecommunications company.”

Such wholesale arrangements will be made easier after Sprint Nextel spins off Sprint’s local wireline holdings, which could be a competitor to cable companies in certain markets nationwide. The spinoff will create the nation’s largest independent phone carrier with 8 million lines.

Another potential synergy in a Sprint/Nextel merger involves the companies’ 2.5 GHz spectrum assets. Because of the patchwork nature of licenses in this band, no carrier has successfully offered broadband services on a widespread basis using the 2.5 GHz airwaves. However, Sprint and Nextel own 2.5 GHz licenses in 85% of the top 100 markets. That would make a nationwide rollout a realistic possibility, although Forsee said the company had not committed to such an effort.

“We’ll be positioned to take advantage of that opportunity, should we choose to pursue it,” Forsee said.

News of the merger announcement has significant impacts elsewhere in the wireless industry. A Sprint/Nextel merger would leave T-Mobile easily as the smallest nationwide mobile carrier, both in terms of subscribers and spectrum holdings. As a result, many analysts expect T-Mobile to bid aggressively in upcoming FCC spectrum auctions during the next year.

Meanwhile, Donahue said the merger would have “very little to do” with the 800 MHz rebanding process that has been a primary focus for public-safety communications officials. Nextel has until Feb. 7 to agree to fund the rebanding, which would result in the carrier receiving contiguous spectrum at 800 MHz and 1.9 GHz that would greatly bolster the spectrum holdings of the merged company (see news story, page 10).

Initial reports of the merger caused many analysts to express concerns for Motorola, under the supposition that the vendor giant would be losing its exclusive supplier position with Nextel as the merged company migrated to CDMA. But Donahue said Motorola would continue to play a vital role in the plans of Sprint Nextel.

“Think about the power of the Nextel network, with its push-to-talk capability, and the power of the Sprint network, with its considerable data capability,” Donahue said. “Now, consider the power of a dual-mode phone built by Motorola. … Motorola is going to have a long life with this company.”

Rudy Baca, Precursor wireless strategist, said the strategy of maintaining two networks makes sense and should minimize any negative impact on Motorola, which announced a three-year extension of its contract with Nextel.

“It’s much cheaper to run two networks than trying to integrate them,” Baca said. “If you can do the integration on handsets, that’s much easier, and you achieve the same goal.”

While the merger should not hamper Motorola and should bolster CDMA developer Qualcomm, the same cannot be said for Flarion, which has yet to have a wireless carrier adopt its Flash-OFDM technology. Nextel was testing Flarion’s offering as its 3G broadband data technology, but the Sprint/Nextel announcement amounts to “technological death certificate” for those plans, according to Baca.

Given the relative ease with which regulators approved Cingular Wireless buying AT&T Wireless earlier this year, the merger of current No. 3 Sprint and No. 5 Nextel is expected to sail through the regulatory process.

Indeed, the greatest potential hurdle to the Sprint/Nextel deal is rival Verizon Wireless, which has long coveted Sprint and reportedly received approval from partner Vodafone to make a competing bid. Like Sprint, Verizon uses a CDMA network, so the technological integration would be relatively simple.

“By bidding, [Verizon] could thumb their nose at Nextel — something they like to do — and block cable’s best way to include wireless in its bundle,” Baca said. “We think they will make a bid and that they will do it relatively quick … in the next few weeks.”

Other analysts disagreed, noting that Sprint would have to pay Nextel a $1 billion breakup fee if it opted to be bought by Verizon. In addition to the added expense, having a pending merger before the same regulators that are reviewing Verizon’s wireline deregulation requests would not be ideal for the RBOC’s lobbying efforts.

Finally, a Verizon/Sprint deal would receive much more regulatory scrutiny than a Sprint/Nextel combination — a fact that could trouble Sprint officials and shareholders, who watched their company operate in limbo for more than a year before regulators effectively nixed a proposed merger with WorldCom five years ago.

But Baca believes the regulatory concerns surrounding a possible Verizon/Sprint deal are overblown. The ease with which Cingular Wireless and AT&T Wireless — previously the No. 2 and No. 3 wireless carriers, as Verizon and Sprint are today — were allowed to combine bodes well for a Verizon/Sprint deal being approved.