dailywireless.org » Sprint-Nextel to Merge

Sprint-Nextel to Merge

Sprint on Wednesday agreed to buy mobile telephone company Nextel in a deal worth $36.3 billion (Google News and Yahoo News). “I can’t wait to put these companies together. I’m champing at the bit,” said Tim Donahue, president and CEO of Nextel, who will become chairman of the combined entity, to be called Sprint Nextel.

Sprint Chairman and Chief Executive Gary Forsee (left) is to become CEO of the new company, while Nextel CEO Timothy Donahue (right) will become chairman. The deal would combine the No. 3 and No. 5 U.S. wireless carriers and create a new company with about 40 million customers, greatly narrowing the gap with industry leaders Cingular Wireless and Verizon Wireless.

The two companies, along with their affiliates and partners, operate networks that directly cover nearly 262 million people, more of the U.S. population than any other carrier.

A merged Sprint/Nextel results in the following USA cellular totals:

Cingular: 46 million (30% of the market)
Verizon Wireless: 42 million (24% of the market)
Sprint/Nextel: 39 million (13% + 9% of the market)
T-Mobile: 16.5 million (8% of the market)

Sprint plans to spin off its local telephone business to shareholders of the new company, to be called Sprint Nextel, as part of the deal. The transaction values Nextel at $32.63 per share based on Tuesday’s closing prices, representing a premium of almost 9 percent over Nextel’s closing price of $29.99 on Nasdaq on Tuesday. The deal has a break-up fee of roughly $1 billion, executives said. That means if another buyer emerges for one of the companies, say Sprint, that suitor would have to pay the fee to Nextel, the party left out.

Though a conference call, Nextel CEO Tim Donahue assured that IDEN is going to be around till 2007, and Motorola will develop a dual-mode phone. In addition, he assured the investors that the combined company will ensure a smooth transition to the push-to-talk over 3G networks, for its current and future customers. The enhanced network spectrum and capacity will make sure it can pursue further MVNO opportunities, especially with the cable companies, according to Om Malik.

The merger will attempt to smoothly combine 39 million customers using two divergent networks. Nextel has aimed its popular “push-to-talk” walkie-talkie service mostly at business consumers, who account for roughly three-fourths of its customer base. That ratio of business to consumers is flipped at Sprint, which has had a greater emphasis on retail customers and data services.

Sprint Nextel’s plans include migrating over time Nextel services, including push to talk service, to Sprint’s planned EV-DO network. EV-DO Revision A provides the upstream bandwidth to handle VoIP over the channel. It has an uplink speed of 1.8 Mbps with 3.1 Mbps downstream, making it possible to send VoIP voice packets with header information without degradation of voice quality. That allows Sprint to skip the wait for an EV-DV (Data + Voice) implementation and utilize the cost efficiencies of VoIP. That upgrade to EV-DO should be ready in 2005.

Sprint Nextel will have the capability to deploy new services on the two companies’ 2.5GHz combined spectrum holdings that together cover 85 percent of the households in the top 100 markets. Sprint Nextel will also utilize Sprint’s nationwide fiber optic wireline network which extends to 60 metropolitan networks and 37 international fiber points of presence.

The combined Sprint Nextel is expected to deliver operating cost and capital investment synergies with an estimated net present value of more than $12 billion. These synergies will be derived primarily from:

Saving network operating expenses by reducing the number of cell sites and switches.
Reducing overall capital expenditures by extending the advantages of Sprint’s current deployment of next-generation EV-DO technology to the combined customer base, including migration of Nextel’s push to talk services to CDMA.
Migrating Nextel backhaul and other telecommunications traffic to Sprint’s long haul infrastructure.
Optimizing customer care, billing and IT costs by consolidating operations, infrastructure support costs and overhead while maintaining high quality services.
Reducing combined sales and marketing costs.
Lowering overall general and administrative costs.
Reducing network capital expense after the merger by building a true IP-based multimedia network.

The companies, which have a combined market capitalization of about $70 billion, had combined revenue of $40 billion for the 12 months ended Sept. 30, including about $6 billion from Sprint’s local telephone business.

Sprint and Nextel said they expect savings of about $12 billion from the deal, from reductions in capital spending and operating costs. Sprint Chairman and Chief Executive Gary Forsee said there would be job cuts, but he did not provide specifics. After its recent merger with AT&T Wireless, Cingular Wireless said it would cut about 10 percent of its work force, or 7,000 jobs.

Sprint and Nextel said they were forecasting integration costs of $1 billion to $1.3 billion in 2006, and an additional $200 million to $500 million in 2007.

Jeff Kagan, an independent telecom analyst, thinks the proposed merger makes sense. “This creates three big wireless companies carrying about 75 percent of the traffic, which is very helpful. Three major carriers can keep prices low for customers, expenses lower for the companies and innovation high”.

Sen. Mike DeWine, R-Ohio, chairman of the Senate Judiciary Subcommittee on Antitrust and Herb Kohl, D-Wis., a ranking member, are not so sure. They released a joint statement Tuesday saying they “look forward to holding hearings to examine how this merger will affect competition. Their statement said the merger was “another step towards increased consolidation in the wireless market and therefore merits close review.”

FCC Chair, Michael Powell promises a rigorous review of the proposed merger. He said he received assurances from the companies that the combination would have no impact on the FCC’s proposal to swap airwaves with Nextel to solve interference problems with police, fire and rescue communications. Nextel has yet to agree to that plan.