Updated from 8:20 a.m. EST
confirmed their $35 billion merger Wednesday, setting ambitious plans for growth along with extensive cost-cutting.
The combined company is to be called Sprint Nextel, with operational headquarters in Sprint's hometown of Overland Park, Kan. Sprint Chief Gary Forsee will run the company, which will be the third-largest U.S. wireless carrier behind
, boasting about 39 million subscribers. Nextel Chief Tim Donahue will be chairman.
"Sprint Nextel is expected to have the highest average revenue per user (ARPU) in the wireless industry and to be positioned to lead the industry in sustainable revenue growth," the companies said in their Wednesday morning press release. "Sprint Nextel will be well positioned in the fastest-growing areas of the telecommunications industry, including mobile data and push-to-talk services, where Sprint and Nextel are innovators in technology."
Shares in both companies slipped modestly Wednesday following a sharp run-up in recent days. Investors have applauded the match of Sprint's strong consumer business with Nextel's loyal business following.
"This is good for Nextel because it solves their technology migration issue," says analyst Lisa Pierce of Forrester, referring to Nextel's need to upgrade its network for the so-called third-generation suite of fast wireless data capabilities. Meanwhile, she sees the deal as a good one for Sprint because it strengthens the company's hand in the lucrative business services market.
Early Wednesday, Sprint fell 29 cents to $24.81 and Nextel dropped 9 cents to $29.90.
Meanwhile, a rumored bid from Verizon Wireless failed to materialize even as many investors continue to see the company as the
key to how the industry's consolidation trend plays out.
Terms call for Nextel shareholders to receive stock and cash equal to 1.3 Sprint shares, a ratio that currently comprises 1.28 Sprint shares plus 50 cents. Shareholders of both companies would end up owning exactly half of the surviving entity and the board would include six directors from each.
The companies confirmed several features that had been previously reported, most notably a plan to spin off Sprint's local phone business after the transaction is completed, probably late next year. That business does about $6 billion in annual revenue.
The two companies currently have a combined marketcap of about $70 billion, more than 35 millionwireless subscribers via their own networks and 5million more through partnerships. By merging, theyexpect to achieve "operating cost and capitalinvestment synergies" of more than $12 billion.
At a highly polished Wednesday morning press conference, the companies indicated they expect to gain those synergies through back-office consolidation, network efficiencies and rationalized capital spending, among other things.
The plan calls for the companies to trim employment sharply over the next year-plus, through layoffs, attrition and the spinoff of the Sprint local phone business, the companies said at the press gathering at Manhattan's St. Regis hotel.
Sprint and Nextel said they have around 77,000 jobs together right now and that they expect to have 55,000 by the end of 2006, when integration of the deal is in full swing.
One advantage of the Sprint Nextel tie-up from a strategic point of view, Pierce indicates, is that the merger makes the combinedcompany far more attractive as a partner for the bigcable companies that are increasingly vying fortelecom customers. The new company's broad appeal forconsumers and business customers puts it "in astronger position" to strike deals with big cableoperators such as
as cable and telcooperators alike aim for increased bundling of variousservices.
Pierce says sticking points remain, however, suchas how the combined company will handle the sunset ofNextel's iDEN network. That technology is one that'snot used by other players in the industry, and hasbeen widely seen as a hurdle for a combined SprintNextel to overcome. Pierce expects the company tocontinue using iDEN for a while before finallyconverting all its customers to the fast-growing codedivision multiple access, or CDMA, standard.
Smoothly handling the transition will be a crucialchallenge for the company because Nextel's so-calledpush-to-talk walkie-talkie function is key to itsindustry-leading customer loyalty and monthly revenuefigures.
She also notes that serving business customershasn't been a core strength of Sprint, which hasmostly served consumers, especially on the wirelessside. "Sprint will have to learn the expertise theywill need to serve these customers," Pierce says.
Nextel noted that the deal could trigger a putright owned by its publicly traded affiliate
, which sells wireless services ina handful of U.S. cities. The price of that buybackwill be determined after an interval that could"extend for a substantial period of time aftercompletion of the merger." Nextel owns 32% of NextelPartners.
While the agreement is now publicly formalized, itcould still face hurdles if Verizon decides to step inwith its own bid for Sprint.
The Wall Street Journal
reported that Verizon this week received a blessing from wirelesspartner
to make a bid afterconsidering one for more than a year.
On Wednesday, the newspaper said Verizon has madeno decision on a Sprint takeover offer, and itappeared no closer to one than it was earlier in theweek. The Sprint-Nextel deal reportedly includes a $1billion breakup fee that would have to be paid by ahostile acquirer.
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