Cingular Wireless' US$41 billion bid to take over AT&T wireless -- the biggest cash offer in US history -- is making investors sweat.
"It's a very full price for a business with falling subscriber numbers and profits," said Julian Hewett, telecommunications analyst for the European consultancy firm Ovum.
The price blasted the only other bidder, British giant Vodafone, out of the race and delighted investors in London who had been fretting over reports Vodafone had offered US$38 billion.
"If Vodafone's game was to drive up the price, then it's certainly succeeded," Hewett said.
At US$15 a share, the offer for AT&T Wireless was 36.5 percent above its closing price on Jan. 21, the day before the second US wireless telecoms company was effectively placed on the block.
Cingular's parents -- SBC Communications, which owns 60 percent of Cingular, and BellSouth Corp, which owns the other 40 percent -- were under pressure. SBC shares fell US$0.21, or 0.84 percent, to US$24.66 and BellSouth dropped US$0.49, or 1.66 percent, to US$29.06.
Vodafone, meanwhile, surged 6.2 percent to ?1.4075 in London.
New York-based Moody's Investors Service and Standard and Poor's agencies warned they may downgrade Cingular Wireless' and its parents' credit ratings because of an expected increase in debt to pay for the deal.
SBC and BellSouth were expected to use debt to finance a major portion of the US$36 billion net cash funding required for the deal, said Standard and Poor's credit analyst Catherine Cosentino.
That extra debt triggered the downgrade threat.
"In addition, Standard and Poor's will assess the effect on these companies' business risk profiles that the acquisition will have, including integration risk, as well as greater scale and other synergistic benefits," she said.
"Given that there will still be five major national wireless players after this transaction, industry competition and pricing pressures may not be markedly reduced from this combination. In fact, pricing pressures may be exacerbated if Cingular chooses to be more aggressive."
Cingular president and chief executive Stan Sigman said he was "very comfortable" that savings through synergies between the two companies would cover the huge premium in the price.
The companies could find synergies worth US$1 billion dollars in 2006 and then US$2 billion annually from 2007, he said.
Some of the synergies would be found by eliminating jobs.
"Yes, there will be employees that are affected by this," Sigman told a telephone news conference.
The number of workers affected was not yet known, he said.
Legg Mason researchers said they expected regulators to clear the deal, but they warned that Cingular or AT&T Wireless may be asked to sell some assets in areas where they have combined dominance.
"It poses greater risks of conditions and/or divestitures than a Vodafone purchase would have," said a report by Legg Mason analysts Blair Levin, Rebecca Arbogast and David Kaut.
Zones where the two firms have their most entrenched markets -- Dallas, Miami, San Antonio, Oklahoma City, Orlando, and Jacksonville -- were most at risk for forced divestitures, they said.
But Cingular and AT&T Wireless might successfully argue that new US rules allowing customers to change companies while keeping their telephone numbers unchanged made such conditions unnecessary, the analysts said.
A Cingular-AT&T Wireless combination could be good news for US competitors, said telecommunications analyst Andy Belt, from Adventis in Boston.
It "will mean a modest reduction of competition for other players on the market and slightly less price pressure," Belt said.
The integration of the two businesses would not be easy, he warned, possibly giving rivals a chance to steal opportunities.
The deal also left British giant Vodafone stuck with a 44.4-percent stake in Verizon Wireless, which it had been prepared to dump in favor of AT&T Wireless.
"Vodafone has shown its hand, they're not happy with their minority stake in Verizon Wireless," Belt said.
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