Sprint Corp. and Nextel Communications Inc. tied the knot last week in what the two telecom providers call a $35 billion “merger of equals.”
The newly formed Sprint Nextel operation will serve more than 35 million customers, including Sprint PCS’ 2.8 million resale customers, and strengthen Sprint’s current position as the nation’s third-largest wireless operator behind Cingular Wireless L.L.C. and Verizon Wireless. The carriers also said the new company would operate networks covering approximately 262 million potential customers, with analysts estimating an average of 49 megahertz of spectrum in the nation’s top 50 markets.
The merger announcement follows recent government approval of Cingular Wireless L.L.C.’s $41 billion acquisition of AT&T Wireless Services Inc. If a Sprint/Nextel combo is approved, the number of nationwide wireless operators would drop from six to four, which many industry observers predict is the minimum the government will allow.
The Sprint/Nextel merger, which is expected to close during the second half of next year, calls for Sprint and Nextel shareholders to each own half of the new operation. Each current Sprint share will be exchanged for a new share in Sprint Nextel and each current Nextel share would be exchanged for a cash/stock combination equal to 1.3 shares of Sprint Nextel.
Sprint also said it plans to spin off its local wireline operations after the merger closes in a tax-free transaction to Sprint Nextel shareholders, though it has not yet determined if the spinoff would include its Sprint North Supply business.
Sprint Chairman and Chief Executive Officer Gary Forsee will become president and CEO of Sprint Nextel, while Nextel President and CEO Tim Donahue will be chairman of the new operation.
“Nextel is recognized as a leader in profitability, customer loyalty, revenue per customer, push to talk and marketing to business and government,” Forsee said of Sprint’s merger partner, adding, “Sprint excels in the consumer business and in providing advanced wireless data services and global IP voice and data networks. Together we will be positioned to provide the high-value, integrated communications solutions customers increasingly demand.”
Other executive appointments include Sprint President and Chief Operating Officer Len Lauer serving as COO of Sprint Nextel; Nextel Executive Vice President and Chief Financial Officer Paul Saleh serving as CFO of Sprint Nextel; Nextel Executive VP and COO Tom Kelly will be Sprint Nextel’s chief strategy officer; and current Nextel executive VP and Chief Technology Officer Barry West will be CTO of the new operation.
The company’s new board of directors will consist of 12 members split between Sprint and Nextel and will include two co-lead independent directors. The company will have its executive headquarters in Reston, Va., where Nextel is based, while its operational headquarters will be in Sprint’s Overland Park, Kan., campus.
Despite keeping operations separate in their respective headquarters, Nextel’s Donahue downplayed any sort of cultural differences between the two companies.
“We share compatible cultures built on traditions of innovation and competitiveness,” Donahue explained. “We will have the resources to develop and deploy compelling, differentiated services by unleashing the combined strengths of the two companies, each of which is recognized as a product and network innovator.”
Beyond the possible cultural differences between the two carriers, most industry analysts noted the biggest challenge facing Sprint Nextel is on the technology side. Sprint operates a nationwide CDMA-based network operating exclusively in the 1.9 GHz spectrum band, while Nextel’s network uses Motorola Inc.’s proprietary iDEN technology and a mish-mash of contiguous and non-contiguous spectrum in the 800 MHz and 900 MHz bands.
Sprint Nextel said it would continue with Sprint’s planned deployment of CDMA2000 1x EV-DO technology across its network and eventually plans to migrate Nextel’s iDEN-based network in the 800 MHz spectrum bands to CDMA over the next several years. Nextel’s much-heralded walkie-talkie Direct Connect offering also will be migrated to the EV-DO network in the 2006 or 2007 time frame, following the deployment of EV-DO Revision A, though the company said it would continue to maintain the iDEN network for Direct Connect-centric customers.
Analysts said the continued support for Direct Connect could prove critical as competing services using CDMA networks are not expected to provide competitive performance for several years.
Nextel also will abandon its plans to deploy Flarion Technologies Flash-OFDM technology, which the carrier has launched in select North Carolina markets, in favor of an EV-DO deployment. Analysts noted that Sprint Nextel could still launch a Flarion-based network using its combined 2.5 GHz spectrum holdings, which Sprint Nextel noted covered 85 percent of households in the top 100 markets, or use another IP-based technology.
Sprint Nextel also is expected to use Nextel’s pending 1.9 GHz spectrum, which the carrier is set to receive as part of a spectrum swap with the Federal Communications Commission. FCC Chairman Michael Powell said last week that Nextel’s 800 MHz obligation would transfer to the proposed merged entity.
Despite some concern that Sprint is paying too much for its share of the merger, the combined operation said it expects to deliver more than $12 billion in operating cost and capital investment savings through the reduction of cell sites and switches; a reduction in capital expenditures; migrating Nextel’s backhaul traffic to Sprint’s long-haul infrastructure; consolidated customer care, billing and information technology costs; reduced sales and marketing costs; and lower general and administrative costs.
The deal also prevents Nextel from having to commit financial resources to a third-generation technology as a stand-alone company, which many industry observers forecast would have cost the carrier several billion dollars and would have had to be initiated by early next year or Nextel would fall too far behind its competitors in providing high-speed data services.
Additional savings are expected to come from employee reductions; the combined operations today employ nearly 80,000 people, including approximately 18,000 working at Sprint’s local wireline division. Sprint Nextel said there would be “forced reductions over time to eliminate duplications and redundancies,” but that until the merger is approved, both companies would continue to operate as separate entities.
The potential job cuts drew ire from the Communications Workers of America, which called on state and federal regulators to “carefully address the critical issues raised in the proposed deal.” The CWA, which said it represents about 3,400 Sprint local wireline employees in 11 states, asked that regulators “make certain that Sprint workers at the local telephone companies are not subject to job loss, reduction in their standard of living and loss of pensions and other benefits” due to the merger. The CWA supported approval of Cingular’s acquisition of AWS.
Government regulators voiced guarded support for the deal.
“The proposed merger-which would result in the number of wireless competitors being reduced from six to four in the last year-is another step toward increased consolidation in the wireless market and therefore merits close review,” said senators Mike DeWine (R-Ohio) and Herb Kohl (D-Wisc.), chairman and ranking member of the senate judiciary subcommittee on Antitrust, Competition Policy and Consumer Rights, in a statement.
DeWine and Kohl added that the reduction in wireless competition that would result from the merger could be offset by increased competition and innovation brought to the market by a combination of Sprint and Nextel that would not have been possible from each company separately.
