WASHINGTON-The government’s review of the proposed $35 billion merger between Sprint Corp. and Nextel Communications Inc. could be complicated by Sprint wireless affiliate US Unwired Inc. The affiliate made a surprise call for federal regulators either to reject the deal or require divestitures of certain wireless properties currently subject to a contractual arrangement between Sprint and US Unwired.
“If approved without modification, the proposed merger would result in a violation of US Unwired’s exclusive territory rights, because the Nextel wireless network that will be acquired by Sprint currently operates in the US Unwired service areas where Sprint is precluded from operating a wireless network,” US Unwired told the Federal Communications Commission in a June 2 filing.
US Unwired’s concerns center on an affiliate agreement that it said prohibits Sprint from operating a wireless network in US Unwired’s service area. US Unwired claims the original agreement made with its Louisiana Unwired L.L.C. subsidiary did not define the terms of the network and thus included any wireless network regardless of spectrum used.
Agreements made with other US Unwired subsidiaries included stipulations for “a radio communications system operating in the 1900 MHz spectrum range,” which is the spectrum band Sprint and its other affiliates currently use for the nationwide network.
US Unwired claimed that because the original agreement includes all spectrum bands, the exclusivity provision will be violated by Nextel and its affiliate Nextel Partners Inc.’s use of the 800 MHz spectrum bands in US Unwired’s markets. US Unwired also claimed that Nextel and Nextel Partners’ current coverage overlaps at least 86 percent of US Unwired’s network.
US Unwired also noted that Nextel has stated plans to migrate its customer base to the 1900 MHz spectrum band, which will further violate terms of its agreement. Nextel is in the process of exchanging some of its 800 MHz spectrum for 1900 MHz spectrum as part of the FCC 800 MHz spectrum reallocation plan.
“The application makes clear that Sprint intends to operate Nextel’s network seamlessly and immediately after the merger and, indeed, in replete with admission that Sprint will compete directly with US Unwired in US Unwired’s exclusive areas after the merger closes,” US Unwired said in its filing.
US Unwired said it is frustrated with attempts to settle the matter.
“US Unwired has tried repeatedly to resolve this conflict with Sprint, but Sprint has made virtually no effort to propose a meaningful, good faith solution,” the Sprint affiliate stated. “Indeed, over the last 20 days, Sprint has made statements or taken positions suggesting that it intends to defer resolution of the dispute until after the merger is consummated.”
Sprint expressed similar frustration with its renegade affiliate.
“Sprint is currently in negotiations with each of our affiliates to develop a win-win solution for all parties in association with the pending merger of Sprint and Nextel,” Sprint said in a statement. “To that end, we are disappointed that US Unwired has chosen to bring a matter of contractual negotiation to the FCC for consideration. We do not agree with US Unwired’s interpretation of the contract terms as presented to the FCC and do not believe that this contractual matter is an issue that is appropriate for the FCC to act upon. Sprint values our affiliate relationships, and we look forward to reaching mutually agreeable arrangements.”
Sprint did extend an exclusivity agreement covering both the 1900 MHz and 800 MHz spectrum bands to former affiliate AirGate PCS Inc., which was recently acquired by fellow network partner Alamosa Holdings Inc. Analysts noted that Sprint probably will have to renegotiate the exclusivity provisions of the affiliate agreements with its other network partners prior to the close of its acquisition of Nextel.
US Unwired’s troubles with Sprint also include an ongoing legal battle initiated in 2003. US Unwired claims that Sprint forced the carrier to turn over nearly all of its back-office services to Sprint and that Sprint delayed payments and access to advanced services to US Unwired.
Unlike most of Sprint’s other affiliates, US Unwired operated its own rural cellular network and even began building its own PCS network prior to reaching an affiliate agreement with Sprint. US Unwired, which has since sold its cellular operations to Cingular Wireless L.L.C., noted it had the capabilities to perform most of its own back-office procedures.
Sprint has already settled similar legal complaints filed by other affiliates. The US Unwired court case is scheduled to be heard this summer.
US Unwired also announced earlier this year that it planned to stop selling Virgin Mobile USA L.L.C. prepaid services in its markets in favor of its own no-contract offering. The Virgin Mobile USA service is a mobile virtual network operator joint venture between Sprint Corp. and Richard Branson’s Virgin Group plc that currently serves more than 3 million customers and is seen as Sprint’s biggest play in the rapidly growing MVNO prepaid market.
SG Cowen & Co. telecommunications industry analyst Thomas Watts said the issues with US Unwired could provide the necessary incentive for Sprint to acquire the affiliate sometime this year. The current affiliate agreements provide each Sprint network partner with a “put option” that would force Sprint to acquire the affiliate at 80 percent of its entire business value. Nextel Partners’ put option would require Nextel to acquire its affiliate for fair market value plus a put premium.
Watts added that he expects the newly formed Sprint Nextel entity eventually will acquire all of the affiliates over time following Sprint’s purchase of Nextel.
The FCC is more than halfway complete with its antitrust and public-interest analysis of the No. 3 mobile-phone operator’s planned purchase of the No. 5 wireless carrier. The transaction, which is expected to close in the third quarter, would make Sprint a stronger No. 3 behind No. 2 Verizon Wireless and Cingular, the nation’s largest cellular company. The Justice Department also is scrutinizing the merger.
Asked about progress in meeting a self-imposed 180-day deadline for completing work on the Sprint-Nextel deal and other major telecom mergers, Federal Communications Commission Chairman Kevin Martin last Thursday told reporters: “We are certainly working toward it. I know that there is still information that we are requesting, so the staff is still looking at it, but I know they are working diligently to try and make those decisions expeditiously and try and make those deadlines.”
Sprint and Nextel have scheduled a shareholder vote on the deal for July 13.
At the FCC, consumer and community technology groups argue Sprint’s and Nextel’s 2.5 GHz broadband holdings would give the merged entity market power in the emerging wireless broadband space. As such, the organizations have demanded the companies dispense with some of their 2.5 GHz assets. Some carriers have expressed fear that Sprint Nextel could put an end to roaming agreements with them. Nextel recently told the FCC that is not the case.
