Going wireless isn't getting any cheaper, but it isn't getting any less crucial for telecom companies with global ambitions, either.
If Merger Fails, Expect WorldCom to Return to the Hunt
That's the dilemma
faces as its $115 billion acquisition of
, which was conceived largely to get WorldCom into the lucrative U.S. wireless market, hangs in the balance. A number of viable wireless players remain, but WorldCom shied away from buying at least one of them last year, when wireless properties were considerably less expensive.
Now the company must either pony up for a pricey wireless operator and risk a short-term earnings hit, or bid for available wireless spectrum itself and build from scratch. Considering WorldCom's massive acquisition track record and the arduous nature of building a wireless operation from scratch, observers are focusing on a pair of money-losing wireless players,
, as possible WorldCom targets. VoiceStream officials didn't return calls seeking comment, while Nextel officials declined to comment on takeover speculation. WorldCom has said talks with Sprint are ongoing and has declined to comment otherwise.
Six of One, Half-Dozen of the Other
Analysts say VoiceStream and Nextel are both strong players, and that neither is a clear-cut better fit with WorldCom than the other. "Nextel is a more mature company, but VoiceStream is faster-growing," notes Art Poole, a wireless telecom analyst with
, which hasn't underwritten for either wireless company. "Both management teams are fantastic." Raymond James has a strong buy rating on VoiceStream and no rating on Nextel.
WorldCom ended merger talks with Nextel for the second time last spring over price, an almost comical thought considering that Nextel stock has roughly tripled since then. Many of the issues that gave WorldCom pause then apply today: Nextel's still expensive -- it's valued at $48 billion, or about 12 times sales -- and it still faces spectrum shortages (hence the company's stated intention to bid for additional spectrum this year). But Nextel has a strong client base that is shifting to include white-collar customers. The company boasts about 5 million subscribers and a network that reaches some 180 million people. Nextel stock slipped 3/4 Wednesday to close at 63 5/16.
VoiceStream is smaller, but possibly better positioned in terms of technology. The company has less than half of Nextel's subscriber base, and its network reaches only around 100 million people. The company reported first-quarter service revenue of only $325 million, about one-third of what Nextel posted, but its stock is also pricey, valued at some $28 billion, or about 22 times sales. Still, it doesn't face the spectrum shortage that threatens Nextel, and it uses a technology, known as global system for mobile communications, or GSM, that dominates wireless telecom outside the U.S. VoiceStream stock fell 6 1/8 Wednesday to 131 5/8.
That said, even the technology issue isn't clear-cut between these two. Nextel phones operate under a technology called integrated dispatch enhanced network, or iDen, allowing them to roam on to GSM networks. That makes technology less of an issue, according to one analyst. But another observer says VoiceStream's GSM network "works so much better on a worldwide basis."
Sucking It Up
Other options exist for WorldCom, but carry their own impediments. The country's second-largest long-distance operator could buy spectrum to build its own wireless network or could, as
suggested in a research report this week, "conclude that it is best off seeking a merger with a foreign-based operator with a high-multiple stock, such as
." Deutsche Telekom and France Telecom officials declined to comment, while Vodafone officials couldn't immediately be reached.
But bidding for, winning and building out spectrum makes for a slow ride to wireless, while merging with a foreign operator such as Deutsche Telekom doesn't immediately answer those carriers' need for a U.S. wireless presence. A Vodafone Airtouch deal would put the U.S. wireless issue to rest, but replace it with the question of how to manage relationships with both WorldCom and
, which itself seeks to become a formidable long-distance player. One telecom investor notes, however, that a foreign operator such as Deutsche Telekom would be attracted to WorldCom for its Internet backbone rather than its long-distance service, a business with increasingly smaller margins and higher churn rates.
One telecom analyst who asked to remain anonymous says he assesses WorldCom's options, assuming the Sprint deal is off, into a 40% chance of buying either Nextel or VoiceStream and a 20% chance the company will purchase spectrum to build its own network. He says the issue of dilution is less important than WorldCom's need to get in on the wireless scene. "It's a matter of strategy at this point," he says. "They'll have to suck it up" on the issue of dilution.