Removing concern over its future network coverage, T-Mobile USA Inc. agreed last week to acquire Cingular Wireless L.L.C.’s California and Nevada operations for $2.5 billion, properties that are currently part of the carriers’ Empire network-sharing arrangement that also includes operations in New York. The deal, which is contingent on government approval of Cingular’s pending $41 billion acquisition of AT&T Wireless Services Inc., dissolves the network-sharing arrangement that was announced in 2001 and provides T-Mobile USA with control of an increasingly important piece of its nationwide network.
As part of the agreement, T-Mobile USA said it would acquire 100-percent ownership of the shared network in California and Nevada for $2.5 billion, which would be offset by a $200 million fee for unwinding the venture, resulting in a total payment of approximately $2.3 billion to Cingular. After gaining control of the GSM network, T-Mobile USA will provide wholesale network services to Cingular for up to four years at rates similar to the current joint venture until Cingular is able to transfer its customers to AWS’ network following the close of that deal.
T-Mobile USA noted the wholesale agreement would guarantee the carrier $1.2 billion in revenue during the next four years based on network usage.
The deal also calls for T-Mobile USA to transfer 10 megahertz of PCS spectrum in New York and 2.5 megahertz of PCS spectrum in Las Vegas to Cingular in exchange for five megahertz of spectrum in San Diego, Sacramento and a number of second-tier markets in California; acquire an additional 10 megahertz of PCS spectrum from Cingular covering the San Francisco, Las Vegas and Sacramento markets for $180 million; and receive an option to acquire an additional 10 megahertz of PCS spectrum in Los Angeles and San Diego during the next two years. T-Mobile USA noted it expects to have between 25 and 30 megahertz of spectrum in most California and Nevada markets and 20 megahertz of spectrum in New York after the deal closes.
T-Mobile USA will also replace its existing roaming agreement with Cingular with a new nationwide agreement with improved terms.
“With this agreement, our customers can be confident they will continue to enjoy the reliable, high-quality service currently provided by our world-class network in California and Nevada without interruption,” explained Robert Dotson, T-Mobile USA president and chief executive officer. “Also, the nationwide reciprocal roaming agreement ensures that our customers will have access to the nationwide networks of T-Mobile USA and Cingular, providing them with the greatest possible coverage.”
Dotson added that since T-Mobile USA launched service in the West Coast markets in the summer of 2002, more than 1.7 million customers have signed up for T-Mobile USA service. Indeed, the carrier said it expects more than 20 percent of all new customers to come from California and Nevada.
In addition to providing T-Mobile with control of its West Coast operations and quelling concerns about the carrier’s network coverage following Cingular’s acquisition of AWS, analysts noted the deal should end up saving T-Mobile USA the expense of building a network.
“For T-Mobile this transaction secures a strong network in California and Nevada without having to undertake a multi-year buildout from scratch,” said RBC Capital Markets telecommunications industry analyst Jonathan Atkin. “We believe T-Mobile would have otherwise had to build out 4,500 to 6,500 cell sites over several years.”
The deal is also expected to work out well for Cingular, which will be able to begin transitioning its customers to AWS network in California and Nevada once the acquisition is complete later this year and add $2.5 billion to its war chest to help fund the AWS acquisition.
“The sale works out great for both companies,” said Ralph de la Vega, chief operating officer at Cingular, who added that the move should also provide some differentiation in the markets as it can now market coverage and quality differences between Cingular and T-Mobile USA.
Cingular added that since AWS’ network in California and Nevada uses both PCS and cellular spectrum, it would mesh well with its own nationwide network, but noted that it likely would have to fill in some coverage holes to bring the network up to its quality standards. The deal also will leave Cingular with between 40 and 65 megahertz of spectrum in most of the top California and Nevada markets following its acquisition of AWS.
The carrier did not express any concern about AWS’ New York operations, which it feels are superior to T-Mobile USA’s network that it is using today and should be bolstered by the additional spectrum it will receive from T-Mobile USA that will result in 55 megahertz of total spectrum.
“We wish we had the best network in New York,” de la Vega said. “AT&T Wireless is much better following its 850 build out.”
In addition to clearing up its network issues, de la Vega said the deal should also help the carrier garner government approval for its acquisition of AWS, which could run into issues due to the vast spectrum holdings of the combined carrier. Analyst reports indicated that Cingular had an “out” clause in its deal to acquire AWS that could be invoked if it was forced to divest more than $8 billion of assets to close the acquisition.
“This should make it easier for the Department of Justice to approve the deal,” de la Vega explained. “We don’t feel there should be any additional assets or customers divested.”
One concern analysts expressed over the network sale was the four-year timeframe Cingular has to transition its customers to AWS’ network, noting that until the transfer is complete it will be at the whim of T-Mobile USA’s network maintenance as well as paying for network access.
Cingular’s de la Vega downplayed the concern, noting it’s very comfortable with the performance of its soon-to-be former network and that the carrier doesn’t expect the transition to take the full four years.
