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Fri, Dec 17, 2004 - Page 12 News List

Latest deal recasts US cell market

CONSOLIDATION The Sprint-Nextel merger will leave the US mobile phone market with just three large players to battle it out for customers


For most of its two decades on the American landscape, the cellphone industry has been known for its freewheeling upstarts and aggressive competition. Yet in just a few years, a wave of mergers has left the industry dominated by a handful of giant companies, with smaller contenders having to carve out niche markets to survive.

The industry was further recast on Wednesday when Sprint and Nextel Communications -- two of the more distinctive and entrepreneurial mobile phone companies -- formally announced a merger that will create a formidable No. 3 carrier. The new company, to be called Sprint Nextel, will join Cingular Wireless, which has 46 million subscribers, and Verizon Wireless, with 42 million, in an elite trio that will control three-quarters of the market.

The deal is worth US$35 billion and creates a company with US$40 billion in annual revenue and 35.4 million subscribers. The merger is expected to be completed in the second half of next year.

The new industry dynamic, where a handful of mega-sized firms battle each other head-on, is a far cry from just a few years ago, when mobile carriers were divided by region and shaped by the personalities of their founders.

Wireless technology has advanced quickly, making it possible for cellular carriers to expand and offer cheaper service. Consolidation in less than a decade has helped put cellphones in the hands of 80 percent of US adults.

The pressure to consolidate exists even among the biggest players. Indeed, Verizon Wireless is considering whether to make a separate bid for Sprint alone. It could, in theory, do so before Sprint's merger with Nextel is finalized. Verizon Wireless, which is owned by Verizon Communications and Vodafone, would have roughly 66 million subscribers if it acquired Sprint, which uses the same cellular technology.

Sprint and Nextel described the deal as a merger of equals, but Sprint is in essence acquiring Nextel. Under the terms, Sprint shareholders would retain their shares, while Nextel shareholders would get cash and stock worth about 1.3 shares in the combined company for each of their shares.

At current rates each Nextel share would be exchanged for 1.28 Sprint Nextel shares and US$0.50 in cash. The exact breakdown for Nextel shareholders will be determined later, but the cash payment will not exceed US$2.8 billion, the companies said.

Sprint and Nextel are optimistic that their size, technology and marketing will make them a strong counterweight to their rivals.

"This is about one plus one equaling much more than two," said Sprint's chairman, Gary Forsee, who will become the chief executive of the new company. Nextel's chief executive, Timothy Donahue, will become the new company's chairman.

The new combined company also hopes to save US$12 billion over the next few years. Nextel, for example, will be able to use Sprint's next-generation data network rather than build its own. The companies, which together will have 77,000 employees, may also reap some savings from job cuts, but did not say on Wednesday how many they plan to eliminate.

The new company will have its executive headquarters in Reston, Virginia, where Nextel is located, and its operational base in Overland Park, Kansas, home to Sprint. But the dual headquarters could be a sign that the companies are reluctant to relinquish power. This could spell trouble, industry experts said, if corporate pride hampers efforts to blend their networks, executive ranks and marketing messages.

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