Sector Spotlight: A Respite From the Wireless Merger Fury

After more than a year of intense consolidation among mobile phone carriers, it's time for a breather.

Of course, the break won't last long, but it will provide time for two events that must happen before the merger race can resume hotter than ever: a conclusion to Deutsche Telekom's (DT) proposed acquisition of VoiceStream Wireless (VSTR) and the December auction of additional mobile phone spectrum.

Until then, foreign companies -- including France Telecom (FTE) and NTT's (NTT) DoCoMo -- won't know if they have an open door to U.S. acquisitions. Likewise, domestic companies won't know how much money they'll have left to roll up the rural carriers -- like U.S. Cellular (USM) and Western Wireless (WWCA) -- they need to fill coverage gaps.

In the first instance, international mobile phone carriers that want a U.S. presence -- specifically, companies more than 25% owned by their national governments -- will not get into a can't-win situation. They'll wait until it's clear whether Deutsche Telekom (which is 58% owned by the German government) is permitted to buy VoiceStream, predicts WR Hambrecht & Co. analyst Peter Friedland. Although the acquisition was approved by the Department of Justice last week, it still must clear the Federal Communications Commission and other regulatory bodies, as well as overcome opposition in Congress.

Not every foreign mobile phone operator faces this problem. British Telecom (BTY), for instance, is not owned by the government and could pursue a merger with current joint-venture partner AT&T (T). The two companies last September announced a strategic alliance for their mobile phone operations that was widely viewed as a precursor to a full-blown merger at some point.

But the British carrier is not under pressure to change its current arrangement here, while it is facing considerable criticism at home over the management of its European operations.

France Telecom, however, has industry analysts scratching their heads over whether it plans to be a top-tier global carrier and, if it does, when it will make a bold move abroad. A bid for Sprint (FON) would go a long way toward putting it in the middle of the global playing field, but the company -- the French government still owns a large chunk -- is undoubtedly concerned about the regulatory environment here. VoiceStream, after all, offers only mobile phone services, while Sprint also operates a formidable data network.

On the domestic front, U.S. nationwide wireless operators are focused on the FCC's spectrum auction in December. Aggressive bidding is expected for licenses in prime locations like New York and Los Angeles, where carriers are faced with more customers than they can serve effectively. In extreme cases, a carrier may not own any licenses at all in a key market. Such is the case for the joint venture of SBC (SBC) and Bell South (BLS) in New York.

Analysts expect that total bids for the spectrum could range from $10 billion to $20 billion. With that kind of capital requirement, the rural carriers can wait. "They want to have as much dry powder on hand for the spectrum auctions as they can," says Raymond James analyst Art Poole.

Once they've digested the spectrum auctions, nationwide carriers can feed on the rural operators. By buying them, the big players will eliminate current roaming charges and time-consuming network build-outs. The problem with being forced to wait is that the rural carriers appear cheap at the moment, with stock prices down anywhere from 24% [Price Communications (PR)] to 60% [Centennial Communications (CYCL)] from their 52-week highs.

But it's not a disaster for the nationwide operators because they haven't fared much better. This makes them less likely to want to use their stock as acquisition currency now, Poole explains. In a market that has recently backpedaled from the wireless industry, AT&T Wireless (AWE), Sprint PCS (PCS), Nextel (NXTL) and VoiceStream are all more than 25% off 52-week highs.

This is not to say that Price Communications doesn't fill a hole perfectly for the upcoming wireless spinoff of Verizon (VZ) or that Dobson Communications (DCEL) and Rural Cellular (RCCC) don't do the same for AT&T Wireless and the SBC/Bell South joint venture, respectively. "I just don't think it's high on their list of priorities," Hambrecht's Friedland says.

One major mountain in an otherwise flat landscape in the near term could be an AT&T-Nextel deal, as was reported last week. Nextel has been looking for a partner to help finance its bids in the December spectrum auction (as well as for another U.S. auction slated for March), and the companies have been in discussions for a couple of months, according to one analyst who did not want to be named. The problem is that Nextel wants more than a 50% premium to its current price, while AT&T is not prepared to go far north of where it's trading today, the analyst says. Nextel closed Friday at $53.69

Nextel's flexibility on a takeout price could be determined by how promising its discussions are with other potential auction partners. But at least one analyst doesn't believe the company will bend much, regardless. "Nextel will go it alone," says the other analyst, who also did not want to be named. Nextel will take in an investor and take on an auction partner, but it will not sell itself outright, the analyst predicts. And AT&T can't afford to meet Nextel's price without facing serious investor backlash, analysts agree.

But if AT&T and Nextel do manage to hammer out a deal, it will have to be soon. Would-be bidders in the December auction have about two months to file for the right to participate, and the companies will have hugely different spectrum needs, depending on whether they join forces.

If they can't work something out, they'll have to catch their breath with all the other runners.

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