AT&T Wireless Services Inc.’s future as well as the future plans of its suppliers and employees were put on hold last week as the carrier announced its board of directors had decided “to explore the company’s strategic alternatives,” which most industry observers equated to putting a “for sale” sign on the nation’s third-largest wireless operator.
Published reports indicated that the carrier had received offers from Cingular Wireless L.L.C. and current minority-interest partner NTT DoCoMo Inc., and that additional offers could be tendered by Nextel Communications Inc. and Vodafone Group plc. While AWS gave no indication that it planned to sell itself to the highest bidder, the carrier did acknowledge it had hired Merrill Lynch & Co. and the law firm of Wachtell, Lipton, Rosen & Katz to advise the board in its plans.
AWS’ management announced its strategic alternative plans last Thursday after moving up its fourth-quarter and year-end 2003 financial release, originally scheduled for this week. The carrier posted operational results that were in line with reduced analysts’ estimates, including 128,000 net subscriber additions during the fourth quarter and higher-than-anticipated 3.3-percent customer churn.
Cingular and NTT DoCoMo were reported to have submitted formal bids in excess of $27 billion for AWS, which was a slight premium over the carrier’s market capitalization last week. Cingular, which reported fourth-quarter and year-end results on the same day, posted mixed results, including a robust 642,000 net subscriber additions, modest revenue gains, flat customer churn and decreased average revenue per user.
Analysts rushed to size up which company would be a perfect fit for AWS’ operation and the effects a potential acquisition would have on the industry.
Most tipped Cingular as the most likely acquirer, citing the deep pockets of its parent companies SBC Communications Inc. and BellSouth Corp., as well as the parent companies’ needs to expand their wireless presence to counteract continuing line losses from their wireline businesses. Others cited the network technology similarities between the two carriers as well as benefits of scale that a merger between the nation’s second- and third-largest carriers could provide.
“We continue to view the combination as the most likely given both companies’ use of TDMA and GSM as the core technology in their networks,” said SG Cowen telecommunications analyst Tom Watts. “The new company’s increased scale would not only benefit from marketing, customer service, back office and capital deployment synergies, but would also boast a very broad and deep spectrum portfolio-allowing the entity to dedicate sufficient spectrum to next-generation networks, while supporting older customers.”
Analysts also noted a deal between AWS and Cingular, or for that matter a deal between AWS and Nextel, would alleviate some competitive pressure in the industry that an acquisition by a foreign company would hinder. UBS Warburg noted in a report that any sort of consolidation among the country’s six nationwide operators would lead to improved industry fundamentals through lower operating expenses, churn and more efficient use of capital and spectrum.
The Yankee Group cautioned that a foreign acquirer of AWS could freeze consolidation between the six nationwide carriers, as nearly all except Nextel would be controlled by a larger parent company.
NTT DoCoMo, which currently has a minority interest in AWS as well as representation on AWS’ board of directors, is seen as the most likely foreign acquirer with analysts noting the company has the ability to raise enough cash to swing a deal for the rest of AWS. The Japanese telecommunications giant has also recently contracted its international operations in a number of markets, which analysts noted could signal the company’s plan for a single large international investment.
Vodafone, which currently owns a 45-percent stake in Verizon Wireless, continues to be the unknown factor in the process as analysts noted the company would be foolish to not take a run at owning outright a nationwide GSM carrier in the United States and has “put” options in its agreement with Verizon Communications Inc. beginning later this year.
Regardless of the acquirer, AWS has already taken a number of steps to streamline its operations, including its Project Pinnacle plan to reach industry-level margins by 2005 that partially resulted in contracting its nationwide operations into its Redmond, Wash., and northern New Jersey headquarters and thousands of layoffs.
One positive of a foreign acquirer of AWS would be that most of the carrier’s current internal organization could remain intact, while a domestic acquirer likely would make sweeping changes as it attempted to integrate AWS into its own operations. AWS would also likely lose its brand identity, which the carrier currently licenses from former parent company AT&T Corp.
“AT&T is the iconic brand in telecommunications and one the acquiring company will have no rights to use,” noted Ovum senior analyst Michael Doherty.
