Mon, Apr 01, 2002 page21

• AT&T, Sprint may seek mergers

  TELECOMS With demand beginning to fall off, major wireless service prividers are likely to cooperate in an effort to lower operating cost and boost profit margins

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  AT&T Wireless Services Inc, Sprint Corp's PCS Group and other US mobile-telephone companies may seek merger partners to cut costs and lift profit amid slowing customer growth, investors and analysts said.

  With almost 50 percent of Americans using cellular phones, carriers are reducing prices by as much as a third to lure subscribers. That's trimming revenue, delaying profitability and making it harder for money-losing companies to repay billions of dollars in debt they've taken on to upgrade networks.

  Acquisitions might eliminate some smaller carriers, such as Deutsche Telekom AG's VoiceStream Wireless Corp, easing price competition and helping stem customer defections, investors said.

  A merger of rivals using the same transmission technology, such as Verizon Wireless Inc. and Sprint PCS, would help avoid duplicative spending to improve networks for new services.

  "There are too many players, too much competition and not enough return on the capital to justify the amount of money that's been spent on upgrades," said Jim Lyon, a portfolio manager at Los Angeles-based Oakwood Capital Management, who's shunning wireless stocks.

  "There's likely to be consolidation." Six US mobile-phone companies sell service nationwide.

  Shares of AT&T Wireless, the third-largest mobile-phone company, declined 38 percent in the first quarter and Sprint PCS, the fourth biggest, shed 46 percent.

  AT&T Wireless, with US$6.3 billion in debt, had a fourth- quarter loss from continuing operations of US$355 million. Sprint PCS, with US$15.6 billion in debt at year's end, had a loss of US$328 million. Verizon Wireless, the largest carrier, and No. 2 Cingular Wireless are ventures without public shares. Parent companies have put on hold plans to sell shares in both ventures.

  US companies probably will add 17 million subscribers this year, down from 21 million last year, said Michael Mahoney, a managing director at EGM Capital, which manages US$1.1 billion.

  Executives or spokesmen at Sprint PCS, Verizon Wireless Inc.

  and rivals said merger discussions are likely. None said any talks were in progress.

  "Everyone expects consolidation at the national level," Leap Wireless International Inc President Susan Swenson said in an interview. Her company sells local-phone service in midsize US communities.

  The likeliest combinations are among carriers using similar transmission systems, such as Sprint PCS and Verizon Wireless, which send voice and data using code-division multiple access technology, analysts said.

  "We're operating under the assumption that we will continue to be a successful player in the industry as a stand alone," Sprint PCS President Chuck Levine said. He conceded "there's certainly the possibility [rivals] will be inclined to merge."

  Verizon Wireless spokesman Jim Gerace said ``we don't have a gun to our head'' to merge, though he wouldn't rule out participating in transactions.

  Another transaction might involve AT&T Wireless, Cingular and VoiceStream, all users of a transmission system known as the global system for mobile communications that gives customers greater international access. Verizon Wireless and Sprint PCS's system is incompatible.

  Technology lines

  "It would make it easier to integrate, and easier to serve both companies' customers" if companies group along technology lines, said Leap's Swenson.

  Cingular, a venture of BellSouth Corp and SBC Communications Inc, has alliances with AT&T Wireless and VoiceStream to speed the introduction of new services. One may lead to a merger, said Todd Rethemeier, a Bear Stearns & Co analyst.

  VoiceStream CEO John Stanton said he wouldn't "speculate on what VoiceStream might or might not do."

  Cingular spokesman Clay Owen declined to comment.

  Competition among carriers heated up in the fourth quarter, as VoiceStream, the seventh-largest mobile-phone company, slashed prices, poaching Verizon Wireless and Sprint PCS customers.

  AT&T Wireless expects more customers on lower-priced monthly plans paying lower bills, Chief Executive John Zeglis said.

  "Our average revenue per customer is going to come down as we penetrate deeper into the population and target segments that may only spend US$30 or US$40 per month," Zeglis said in an interview. The fourth-quarter average monthly bill was US$60.80.

  The company doesn't need a merger partner, he said.

  By offering more free time for calls, AT&T Wireless cut per- minute prices on one plan 33 percent, while Verizon Wireless cut one rate plan 29 percent, Lehman Brothers analysts estimated.

  Lower prices give regulators a way to show they're helping consumers. Yet, they vex shareholders.

  "As an investor, you want less price pressure," to help sustain growth in sales and cash-flow margins, said Larry O'Connell, an analyst at American Express Financial Advisors Inc.

  Nextel Communications Inc may be without a partner, analysts said. The software used in Nextel's walkie-talkie feature, widely used in the workplace, is incompatible with other systems.

  CEO Tim Donahue said he's not seeking a buyer, though his company -- with as many as 12 million business customers -- would be an alluring target.

  "There's a lot of people out there that would love to have this kind of customer base," he said.
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