WASHINGTON-While international attention is focused on Deutsche Telekom AG’s $50.3 billion bid for VoiceStream Wireless Corp. and the fireworks it has set off in Congress, merger and acquisition activity in the coming months is expected to be dominated by smaller wireless transactions as large mobile phone carriers pick up licenses here and there to expand coverage areas and small operators consider cashing out.
The drivers of M&A are varied, with some variables injecting a degree of uncertainty into the process.
Paul Spurgeon, president and managing director of telephony at Nations Media Partners, said downward price pressure on roaming revenue-a consequence of national pricing plans deployed by top mobile phone firms-could prompt rural cellular operators to consider selling their operations. In the past, rural cellular operators have depended heavily on roaming income.
Nations Media Partners, based in Kansas City, represents sellers.
“They really have to examine overall changes in the market,” said Spurgeon, referring to rural cellular operators.
Spurgeon said large wireless carriers are the most likely buyers, with prices for rural cellular properties expected to fetch between $250 and $650 for each potential customer in given service areas.
Another factor that could influence cellular M&A, according to Spurgeon, is the desire of large carriers-acting as managing partners while holding minority interests in cellular partnerships-to gain majority control of licensees to simplify accounting and financial reporting requirements.
“Because of massive mergers on a large scale suddenly these small partnerships become more cumbersome than they once were,” said Spurgeon.
Spurgeon, like others, said the larger wireless carriers are anxious to acquire more radio spectrum to expand network footprints and to accommodate subscriber growth, data and Internet applications.
Because many cellular carriers also own personal communications services licenses, Spurgeon said it is hard to separate out cellular carriers from other wireless service providers insofar as mergers and acquisitions are concerned.
“There really isn’t a true cellular company anymore. Wireless is wireless,” said Spurgeon.
Kevin Reidy, assistant vice president of Denver-based Daniels & Associates L.P., also sees no let up in M&As anytime soon.
“In general, we expect merger and acquisition activity in cellular and PCS to remain strong in the next 6 to 12 months as wireless companies enhance the scope and scale of their operations,” said Reidy.
Reidy said acquisitions provide economies of scale in distribution and operation support systems-like billing-and provide cost savings in network and equipment purchases.
In some cases, sales of wireless assets come about as a byproduct of consolidation in which buying and selling firms have wireless holdings in the same market. In such situations, the 45 megahertz spectrum cap is exceeded and the Federal Communications Commission forces excess wireless spectrum to be divested.
Reidy said that was the case in Verizon Wireless’ recent sale of San Francisco, San Diego and Houston wireless licenses to AT&T Wireless Services Inc.
Likewise, SBC Communications Inc.-by virtue of its alliance with BellSouth Corp.-was forced to sell an Indianapolis wireless license to AT&T as a result of the spectrum cap rule.
Reidy said relaxed rules governing wireless license sales also could fuel more M&As in the near future. He said uncertainty about upcoming 700 MHz and PCS C-block auctions-tentatively set for Sept. 6 and Nov. 29, respectively-could impact M&As.
“I think you’re going to see large companies trying to fill in their footprints … There are a lot of little pieces left to fill out,” said David Freedman, a Bear Stearns & Co. analyst.
In the meantime, Freedman and other Wall Street brokers are watching events on Capitol Hill that could dramatically impact global M&As, particularly Deutsche Telecom’s planned purchase of VoiceStream. Bills are pending in the House and Senate that would prevent telecom firms majority owned by foreign governments from buying U.S. telecom carriers.
The Senate measure, championed by Sen. Ernest Hollings (D-S.C.), is attached to a appropriations bill that could become law in the next few months. If the Hollings’ language is not stripped out of the bill, at least one blockbuster wireless merger will not happen this year. Morever, the legislation could have a chilling effect on other telecom mergers and acquisitions in the pipeline.
