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Sprint, Nextel agree to $35 billion merger

The deal combines the No. 3 and No. 5 wireless carriers and will produce a company with 40 million customers. For Sprint and Nextel, a battle with titans

Sprint will buy Nextel Communications in a $35 billion deal that will create a wireless behemoth.

The deal, announced Wednesday, combines the No. 3 and No. 5 players in the market and will produce a company with about 40 million customers, including those through affiliates.

Sprint and Nextel shareholders will each own 50 percent of the combined company, dubbed Sprint Nextel. The terms of the deal call for each Nextel share to be exchanged for cash and stock in the new company, to a value of 1.3 shares of the new company.

The exact blend of cash and stock will be determined at a later date, but based on Wednesday's share prices, each Nextel shareholder would receive about 1.28 Sprint Nextel shares and about 50 cents in cash for each Nextel share.

Sprint shareholders will retain their existing stock. The total cash payment will not exceed $2.8 billion, according to the companies.

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The merger between the two had been rumored for some time, as the cellular carriers sought a way to fight off rivals including No. 1 Cingular Wireless and No. 2 Verizon Wireless. Cingular recently completed its acquisition of AT&T Wireless, making it the largest wireless carrier in the United States. Sprint Nextel will be the No. 3 player but will have a customer base much closer to those of Cingular and Verizon.

Sprint CEO and Chairman Gary Forsee will be CEO of the new company, while Nextel CEO Timothy Donahue will become chairman. The new company's board will have 12 directors, six from each company. The merger is expected to close in the second half of 2005, subject to regulatory approval.

Donahue jokingly referred to the merger as a surprise, based on the widespread speculation of the proposed deal. In a conference call with the press, the executive said he was "jazzed" about the opportunity to bring the two companies together and observed that the two companies' assets are aligned with the most promising growth areas of the telecommunications business, creating a template for his vision of the industry's future.

"This new, powerhouse company has the spectrum, infrastructure, distribution, and superb and differentiated product portfolio that will drive our continued success," Donahue said. "We're looking forward to competing with the Verizons and Cingulars of this world for the preeminent role in wireless and telecommunications."

Both Donahue and Forsee repeatedly referenced the combination of Sprint's strengths in consumer markets with Nextel's success among business customers as a primary catalyst in bringing the two companies together. Donahue also thanked Nextel's founder, Morgan O'Brien, and the work of its employees, for getting his company through some rough years.

"You all know that this company was written off some three to five years ago," he said. "No one really gave us a chance, and despite that, we have grown this company...and made this all possible."

Merging tech
In his comments, Sprint's Forsee played up the complementary aspects of the two companies' holdings and said that the combined entity would work to establish interoperability across its expanded infrastructure, such as extending Nextel's signature push-to-talk services to all of Sprint Nextel's customers and regional markets.

"We have proven market differentiators like push-to-talk, highly efficient CDMA technologies, advanced high-speed data capabilities and wireless business solutions that are being delivered on the market today, not just promises for the future," Forsee said. "As a combined company, we will strive to integrate these services across our networks and add products and functionality along the way. That's what this is all about--taking two great companies and...creating even more opportunities for customers."

The companies said the merger should produce cost savings of about $12 billion, driven by lowered capital expenditures. This will reduce the number of cell sites and switches, and cut costs for sales, marketing and administration.

Sprint plans to spin off its local telephone business to shareholders of the new company as part of the deal. The local business will be the largest independent local telephone company in the United States, with 7.7 million local access lines in 18 states and revenue of more than $6 billion over the past four quarters.

At least one industry watcher said the merger should help Sprint and Nextel compete more closely with Cingular and Verizon. But Tole Hart, an analyst at research firm Gartner, said integrating Sprint and Nextel's vast telecommunications networks would be no small undertaking.

"I think the merger is a good move, in terms of getting bigger, but I don't think it necessarily improves their economies of scale that much, because the companies will still be operating two separate networks for a while," Hart said. "But long-term, it gives them a lot more flexibility."

Specifically, the analyst said it would take a lot of work on the companies' existing infrastructure to begin offering Nextel's push-to-talk services to Sprint's customers.

"This is really a matter of these companies looking around and wanting to be a big company as well, and trying to match up with Cingular and Verizon," Hart said. "But they're really operating two very different networks, and it's going to take a while to migrate the Nextel customers over to Sprint's CDMA network."

Jeff Kagan, an independent telecommunications analyst, said the Sprint Nextel deal is "good news" for the wireless industry and that regulators are likely to approve it, as it will improve competition among leading vendors.

"Cingular-AT&T Wireless was the first of several major mergers I expected to see in the wireless industry, Sprint Nextel is the second," Kagan said. "We may see one more major deal, depending on the (Federal Communications Commission's) position."

The analyst said the merger should benefit customers by creating three large competitors--Cingular, Verizon and Sprint Nextel--that carry roughly 75 percent of all United States-based wireless traffic.

"Three major carriers can help keep prices low for customers, expenses lower for the companies and innovation high," he said. "The wireless industry needed this wave of consolidation, and this merger will help the market, which has reached bottlenecks with capacity."

Kagan also observed that since Sprint and Nextel were both already planning to spend "a few billion dollars" on network upgrades, the timing of the merger is ideal.