Sprint Corp. and Nextel Communications Inc.’s “merger of equals” announcement last week could have an unequal impact on each operator’s respective affiliate partners. At one time those affiliates were integral to each carrier’s expansion plans, but with the merger announcement, they could become hurdles.
Sprint, which counts 12 network partners serving more than 3 million subscribers, said last week that it planned to initiate discussions with its affiliates regarding their future relationships, but it noted in a government filing that it would be inappropriate to comment on future plans at this time.
Clouding those future plans are the affiliates’ respective agreements with Sprint, which for the most part call for Sprint to lease the affiliates’ spectrum in exchange for an 8-percent cut of service revenues and other financial considerations. The deals also provide the affiliates with exclusive rights to market Sprint PCS-branded services in their coverage areas, though what is included in the exclusive rights could be up for debate.
Some analysts noted that the agreements prevent Sprint only from offering “digital personal communication services” in its affiliate markets, which some said would only include digital services using the 1.9 GHz spectrum bands that were part of the Federal Communications Commission’s original PCS auctions. Using that interpretation, Sprint Nextel would be able to continue to offer services using Nextel’s 700, 800 and 900 MHz spectrum holdings and possibly the 1.9 GHz spectrum Nextel is set to receive from the FCC as part of a spectrum swap. Some people consider that allocation separate from the original PCS spectrum auctioned by the FCC.
Sprint Nextel could also have free reign to launch services using its robust 2.5 GHz spectrum holdings, which analysts have predicted the carrier could use to offer high-speed wireless data services.
Despite the possible impending conflict, one of Sprint’s smaller affiliates, iPCS Inc., which recently emerged from Chapter 11 bankruptcy protection, noted last week that it thought the transaction likely would benefit Sprint’s operations and that it looked forward to negotiating a new post-merger agreement.
“We look forward to those discussions,” said Tim Yaeger, president and chief executive officer of iPCS. “We also look forward to our relationship with Sprint going forward and are confident Sprint sees the benefits of the affiliate program and they will continue to work with the affiliates for our mutual success.”
Yaeger added that he was also encouraged by Sprint naming Steve Nielsen as a co-chief transition officer for the merger with Nextel. Yaeger noted that Nielsen previously worked directly with the affiliates and played a key role in the simplified pricing that Sprint provided to its affiliates for back-office and roaming services earlier this year.
Analysts noted last week that Sprint likely would push out any decision on its affiliates until its merger with Nextel is completed, but that eventually it would look to acquire its network partners.
“We do not expect the new entity to acquire the Sprint affiliates immediately, though we do expect consolidation of these companies in the longer-term,” noted SG Cowen & Co. telecommunications analyst Tom Watts.
Nextel’s affiliate Nextel Partners Inc., which serves more than 1.5 million customers in 31 states, is in a more favorable position as the company’s original network partnership provided Nextel Partners with control of its own spectrum in exchange for Nextel gaining a 31-percent interest in its affiliate. Nextel Partners’ spectrum holdings are estimated to be on average between 11 and 12 megahertz in its markets and-unlike Nextel’s diverse spectrum holdings-are only in the 800 MHz bands. Nextel Partners is also not expected to be part of Nextel’s spectrum swap with the FCC.
The agreement also provided Nextel Partners with a put option that if enacted by one of several actions-including a change of ownership that resulted in Nextel controlling less than 50 percent of a new entity-would force Nextel to purchase all of Nextel Partners at “fair market value” plus a control premium.
Analysts noted that while Sprint and Nextel are engaging in a merger of equals, Nextel probably will own approximately 48.5 percent of the combined entity, which would trigger the put option. A forced acquisition of Nextel Partners could add up to $5.7 billion to the total transaction cost.
Sprint Nextel said in a statement that it would analyze the possible purchase of Nextel Partners in the context of the merger process.
A Nextel Partners spokeswoman said it is too early to say what the carrier’s plans are in relation to the merger announcement, but that it is looking at all of its options.
Fewer obstacles are expected from Sprint and Nextel’s youth-oriented prepaid partnerships, Virgin Mobile USA L.L.C. and Boost Mobile L.L.C. Sprint Nextel noted that while both brands have similar target audiences, each somehow appealed to different parts of that audience and would continue. Sprint’s mobile virtual network operator Virgin Mobile arrangement serves more than 2 million subscribers, while Nextel’s more tightly integrated Boost Mobile offering recently passed the 1 million subscriber mark and is set for further market expansions.
Sprint is also expected to continue to support its MVNO deals with Qwest Communications International Inc., AT&T Corp. and ESPN Mobile.
