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A Telecom Frenzy Over Sprint
By ALMAR LATOUR, DENNIS K. BERMAN and JESSE DRUCKER in New York and
DAVID PRINGLE in London
Staff Reporters of THE WALL STREET JOURNAL
December 14, 2004; Page C1
Verizon Communications has gained the backing of its wireless partner,
Vodafone Group, for a potential bid for Sprint, clearing a major hurdle
to such a deal, according to people familiar with the situation.
An offer by Verizon, the nation's biggest phone company, could scuttle
Sprint's tentative $35 billion merger deal with Nextel Communications,
the upstart, No. 5 wireless company in the U.S. known for its "push to
talk" phones. One reason for the Sprint-Nextel move is the two
companies' shared fear of being left behind by the cellphone industry's
two giants, Verizon Wireless and Cingular Wireless.
The board of Sprint, the nation's No. 3 long-distance phone company and
No. 3 wireless company, met yesterday afternoon to discuss the proposed
Nextel merger in a meeting that is likely to continue today. Nextel's
board also is considering the tentative deal, which is scheduled to be
announced tomorrow in New York.
Verizon Communications officials, who have been meeting to discuss a
possible takeover of Sprint in recent days and have studied the pros and
cons of such a deal for 18 months, also think that regulatory and tax
issues linked to the acquisition could be overcome. However, it remains
unclear whether Verizon will make such a bid.
A successful bid by Verizon would turn Verizon Wireless, the nation's
second-largest wireless operator, into the largest player in the
industry by far, with more than 65 million customers. Just seven weeks
ago, Cingular Wireless passed Verizon for the top spot by completing its
acquisition of AT&T Wireless Services, giving Cingular roughly 47
million subscribers.
Rumors of a potential Verizon bid came during a frenzied day of
merger-related activity in the market. Investors initially bid up shares
of Sprint in anticipation of a Verizon bid. Sprint was up 30 cents, or a
little more than 1%, at $24.44 at 4 p.m. in New York Stock Exchange
composite trading. Nextel was up 23 cents, or less than 1%, at $29.99 on
the Nasdaq Stock Market. Shares of Verizon and the other Bell phone
companies rose in tandem with the market.
"The real story here is Verizon yea or nay," said Carl Schecter, the
managing director for risk arbitrage at Nomura Securities International
Inc. "And why shouldn't Verizon try it, from a strategic point of view?
Why not consolidate their lead?"
If Verizon were to bid for Sprint and win, it would reshuffle the entire
telecommunications industry. Verizon would get stronger in its
fast-growing wireless business, as well as long distance and services
for big businesses, known as enterprise services. It would likely sell
off many of its roughly 55 million traditional local lines as it reduces
its exposure to that struggling part of the industry.
In making such a move, Verizon also could be trying to cut off Sprint's
lucrative business of renting its network to companies that want to get
into the cellphone business. Sprint has reached an agreement with AT&T
Corp. to offer cellphone service and is talking with cable companies,
which increasingly are competing with traditional phone companies, about
doing similar deals.
Finally, a Sprint-Verizon deal would leave Nextel standing at the altar,
facing intense competition from far larger rivals even as it grapples
with a necessary network upgrade that could cost $3 billion.
Casting a long shadow over the developments is Verizon's complicated,
and at times strained, relationship with the company's British partner,
Vodafone. Verizon needs Vodafone's approval to mount a bid for Sprint
because the two companies jointly own Verizon Wireless. Each side also
wants to have 100% control over a U.S. wireless asset. Verizon would
like to see Vodafone exit the joint venture, which it has encouraged
Vodafone to do even in recent days. Vodafone tried to exit by acquiring
AT&T Wireless this year, but it was outbid.
Vodafone, Europe's largest wireless company, supports a Verizon takeover
of Sprint. For one thing, Vodafone isn't interested in buying Sprint on
its own, people close to the company say, but it believes a deal would
boost its own profit. Vodafone also believes the industry will undergo
further consolidation, so whatever entity Vodafone inhabits needs to be
as strong as possible. Vodafone would aim to maintain a 45% stake in any
new entity involving Sprint, the same as it has in Verizon Wireless
today, people familiar with the matter said. That means Vodafone would
have to pay as much as 45% of the takeover price of Sprint; the takeover
price could top $40 billion.
A Verizon Wireless bid for Sprint still would require that Vodafone and
Verizon reach agreement on several issues, including how much to bid and
what to do with Sprint's land-line and long-distance phone operations.
Ironing out these problems could mean a bid for Sprint is days or weeks
away.
Vodafone's support for a bid wouldn't come entirely without a price tag
for Verizon: People familiar with the situation say Vodafone wants a new
dividend arrangement for Verizon Wireless as well as the right to buy
Verizon's stake in Vodafone Italy.
Sprint's main attraction to Verizon is its spectrum, particularly as
Verizon seeks to expand its wireless business. Verizon needs more
wireless spectrum to help it make new technologies such as EVDO, or
wireless high-speed Internet access, a viable alternative to today's
broadband offerings such as Digital Subscriber Lines, or DSL.
Unlike the Sprint-Nextel combination, which involves two separate
networks, Verizon Wireless and Sprint use the same wireless technology,
called CDMA. Nextel uses an unusual technology called iDEN, which isn't
compatible with CDMA. However, Nextel must change its technology in
order to offer higher-speed data services. In this roughly $3 billion
upgrade, it is strongly considering switching its entire network to CDMA.
Some issues remain for a Verizon-Sprint deal. Sprint would bring lots of
land lines to Verizon at a time when the company is trying to reduce its
exposure to its traditional telephone business. Those lines would lose
value when owned by Verizon in lieu of Sprint because they would be
subject to more regulation under a Verizon banner than under Sprint control.
A rough antitrust analysis shows that a Verizon and Sprint deal would
create a highly concentrated presence in places such as Nashville,
Tenn., Rochester, N.Y., and San Diego, according to industry
market-share data reviewed by The Wall Street Journal.
"That's not an easy deal, Verizon-Sprint. It might be doable, but not
easy," said Phil Marchesiello, a telecom lawyer at Akin Gump Strauss
Hauer & Feld LLP.
There would also be significant market-share overlap in places such as
New York City, where Verizon controls roughly a third of the wireless
market and Sprint more than 10%. In Los Angeles, the two would control
an estimated 40% of the market or more.
The government approved Cingular's acquisition of AT&T Wireless even
though the combined company had greater market share than rivals in some
cities. The issue going forward, say people familiar with the matter, is
whether the market strength of the new Cingular wipes out the
possibility of another giant competitor.
This question is colored by how the government analyzes the wireless
business -- by local markets rather than by national market-share
numbers. It is possible Verizon could have to divest itself of a few
large markets, but still keep most of its Sprint purchase intact.
A merged Verizon Wireless-Sprint would, in some big markets, own
licenses well in excess of the unofficial spectrum caps that federal
regulators seemed to enforce in their approval of Cingular's acquisition
of AT&T Wireless. Federal regulators limited Cingular to no more than 70
megahertz in each market.
If Verizon were to acquire Sprint, it would buy the nation's
third-largest provider of data and voice services to corporate
customers. That would effectively break a long-running detente with SBC
Communications, which has a fledgling corporate business compared with
the likes of MCI and AT&T. It also could spur SBC to acquire one of
these companies to compete head-to-head with Verizon for so-called
enterprise business.
In a Sprint-Nextel deal, where the two sides are considering shedding
Sprint's local business, such a move could create a complicated
structure in order to avoid taxes on the spinoff. Normally, when a
spinoff and a merger are part of the same plan, the spinoff can avoid
taxes only if the shareholders in the acquiring company -- in this case
Sprint -- end up with more than 50% of the value and voting power in the
newly merged company.
The Internal Revenue Service also requires that, if shares of the
spinoff are part of the "merger consideration," then the shareholders in
the acquired company -- in this case Nextel -- must only get 20% or less
of the voting rights for the deal to avoid triggering taxes. That is a
problem, says Robert Willens, the tax and accounting analyst at Lehman
Brothers, because the terms of the deal would indicate Nextel
shareholders are entitled to a much greater stake in the spinoff.
Sprint could give Nextel shareholders additional cash or Nextel
shareholders could receive 49% of the shares in the spinoff, but with
lesser voting rights. That would satisfy the rule that they control 20%
or less of the company. "This deal should not be tripped up by tax
considerations," Mr. Willens says.
Write to Almar Latour at almar.latour@wsj.com1, Dennis K. Berman at
dennis.berman@wsj.com2, Jesse Drucker at jesse.drucker@wsj.com3 and
David Pringle at david.pringle@wsj.com4.
A Telecom Frenzy Over Sprint
By ALMAR LATOUR, DENNIS K. BERMAN and JESSE DRUCKER in New York and
DAVID PRINGLE in London
Staff Reporters of THE WALL STREET JOURNAL
December 14, 2004; Page C1
Verizon Communications has gained the backing of its wireless partner,
Vodafone Group, for a potential bid for Sprint, clearing a major hurdle
to such a deal, according to people familiar with the situation.
An offer by Verizon, the nation's biggest phone company, could scuttle
Sprint's tentative $35 billion merger deal with Nextel Communications,
the upstart, No. 5 wireless company in the U.S. known for its "push to
talk" phones. One reason for the Sprint-Nextel move is the two
companies' shared fear of being left behind by the cellphone industry's
two giants, Verizon Wireless and Cingular Wireless.
The board of Sprint, the nation's No. 3 long-distance phone company and
No. 3 wireless company, met yesterday afternoon to discuss the proposed
Nextel merger in a meeting that is likely to continue today. Nextel's
board also is considering the tentative deal, which is scheduled to be
announced tomorrow in New York.
Verizon Communications officials, who have been meeting to discuss a
possible takeover of Sprint in recent days and have studied the pros and
cons of such a deal for 18 months, also think that regulatory and tax
issues linked to the acquisition could be overcome. However, it remains
unclear whether Verizon will make such a bid.
A successful bid by Verizon would turn Verizon Wireless, the nation's
second-largest wireless operator, into the largest player in the
industry by far, with more than 65 million customers. Just seven weeks
ago, Cingular Wireless passed Verizon for the top spot by completing its
acquisition of AT&T Wireless Services, giving Cingular roughly 47
million subscribers.
Rumors of a potential Verizon bid came during a frenzied day of
merger-related activity in the market. Investors initially bid up shares
of Sprint in anticipation of a Verizon bid. Sprint was up 30 cents, or a
little more than 1%, at $24.44 at 4 p.m. in New York Stock Exchange
composite trading. Nextel was up 23 cents, or less than 1%, at $29.99 on
the Nasdaq Stock Market. Shares of Verizon and the other Bell phone
companies rose in tandem with the market.
"The real story here is Verizon yea or nay," said Carl Schecter, the
managing director for risk arbitrage at Nomura Securities International
Inc. "And why shouldn't Verizon try it, from a strategic point of view?
Why not consolidate their lead?"
If Verizon were to bid for Sprint and win, it would reshuffle the entire
telecommunications industry. Verizon would get stronger in its
fast-growing wireless business, as well as long distance and services
for big businesses, known as enterprise services. It would likely sell
off many of its roughly 55 million traditional local lines as it reduces
its exposure to that struggling part of the industry.
In making such a move, Verizon also could be trying to cut off Sprint's
lucrative business of renting its network to companies that want to get
into the cellphone business. Sprint has reached an agreement with AT&T
Corp. to offer cellphone service and is talking with cable companies,
which increasingly are competing with traditional phone companies, about
doing similar deals.
Finally, a Sprint-Verizon deal would leave Nextel standing at the altar,
facing intense competition from far larger rivals even as it grapples
with a necessary network upgrade that could cost $3 billion.
Casting a long shadow over the developments is Verizon's complicated,
and at times strained, relationship with the company's British partner,
Vodafone. Verizon needs Vodafone's approval to mount a bid for Sprint
because the two companies jointly own Verizon Wireless. Each side also
wants to have 100% control over a U.S. wireless asset. Verizon would
like to see Vodafone exit the joint venture, which it has encouraged
Vodafone to do even in recent days. Vodafone tried to exit by acquiring
AT&T Wireless this year, but it was outbid.
Vodafone, Europe's largest wireless company, supports a Verizon takeover
of Sprint. For one thing, Vodafone isn't interested in buying Sprint on
its own, people close to the company say, but it believes a deal would
boost its own profit. Vodafone also believes the industry will undergo
further consolidation, so whatever entity Vodafone inhabits needs to be
as strong as possible. Vodafone would aim to maintain a 45% stake in any
new entity involving Sprint, the same as it has in Verizon Wireless
today, people familiar with the matter said. That means Vodafone would
have to pay as much as 45% of the takeover price of Sprint; the takeover
price could top $40 billion.
A Verizon Wireless bid for Sprint still would require that Vodafone and
Verizon reach agreement on several issues, including how much to bid and
what to do with Sprint's land-line and long-distance phone operations.
Ironing out these problems could mean a bid for Sprint is days or weeks
away.
Vodafone's support for a bid wouldn't come entirely without a price tag
for Verizon: People familiar with the situation say Vodafone wants a new
dividend arrangement for Verizon Wireless as well as the right to buy
Verizon's stake in Vodafone Italy.
Sprint's main attraction to Verizon is its spectrum, particularly as
Verizon seeks to expand its wireless business. Verizon needs more
wireless spectrum to help it make new technologies such as EVDO, or
wireless high-speed Internet access, a viable alternative to today's
broadband offerings such as Digital Subscriber Lines, or DSL.
Unlike the Sprint-Nextel combination, which involves two separate
networks, Verizon Wireless and Sprint use the same wireless technology,
called CDMA. Nextel uses an unusual technology called iDEN, which isn't
compatible with CDMA. However, Nextel must change its technology in
order to offer higher-speed data services. In this roughly $3 billion
upgrade, it is strongly considering switching its entire network to CDMA.
Some issues remain for a Verizon-Sprint deal. Sprint would bring lots of
land lines to Verizon at a time when the company is trying to reduce its
exposure to its traditional telephone business. Those lines would lose
value when owned by Verizon in lieu of Sprint because they would be
subject to more regulation under a Verizon banner than under Sprint control.
A rough antitrust analysis shows that a Verizon and Sprint deal would
create a highly concentrated presence in places such as Nashville,
Tenn., Rochester, N.Y., and San Diego, according to industry
market-share data reviewed by The Wall Street Journal.
"That's not an easy deal, Verizon-Sprint. It might be doable, but not
easy," said Phil Marchesiello, a telecom lawyer at Akin Gump Strauss
Hauer & Feld LLP.
There would also be significant market-share overlap in places such as
New York City, where Verizon controls roughly a third of the wireless
market and Sprint more than 10%. In Los Angeles, the two would control
an estimated 40% of the market or more.
The government approved Cingular's acquisition of AT&T Wireless even
though the combined company had greater market share than rivals in some
cities. The issue going forward, say people familiar with the matter, is
whether the market strength of the new Cingular wipes out the
possibility of another giant competitor.
This question is colored by how the government analyzes the wireless
business -- by local markets rather than by national market-share
numbers. It is possible Verizon could have to divest itself of a few
large markets, but still keep most of its Sprint purchase intact.
A merged Verizon Wireless-Sprint would, in some big markets, own
licenses well in excess of the unofficial spectrum caps that federal
regulators seemed to enforce in their approval of Cingular's acquisition
of AT&T Wireless. Federal regulators limited Cingular to no more than 70
megahertz in each market.
If Verizon were to acquire Sprint, it would buy the nation's
third-largest provider of data and voice services to corporate
customers. That would effectively break a long-running detente with SBC
Communications, which has a fledgling corporate business compared with
the likes of MCI and AT&T. It also could spur SBC to acquire one of
these companies to compete head-to-head with Verizon for so-called
enterprise business.
In a Sprint-Nextel deal, where the two sides are considering shedding
Sprint's local business, such a move could create a complicated
structure in order to avoid taxes on the spinoff. Normally, when a
spinoff and a merger are part of the same plan, the spinoff can avoid
taxes only if the shareholders in the acquiring company -- in this case
Sprint -- end up with more than 50% of the value and voting power in the
newly merged company.
The Internal Revenue Service also requires that, if shares of the
spinoff are part of the "merger consideration," then the shareholders in
the acquired company -- in this case Nextel -- must only get 20% or less
of the voting rights for the deal to avoid triggering taxes. That is a
problem, says Robert Willens, the tax and accounting analyst at Lehman
Brothers, because the terms of the deal would indicate Nextel
shareholders are entitled to a much greater stake in the spinoff.
Sprint could give Nextel shareholders additional cash or Nextel
shareholders could receive 49% of the shares in the spinoff, but with
lesser voting rights. That would satisfy the rule that they control 20%
or less of the company. "This deal should not be tripped up by tax
considerations," Mr. Willens says.
Write to Almar Latour at almar.latour@wsj.com1, Dennis K. Berman at
dennis.berman@wsj.com2, Jesse Drucker at jesse.drucker@wsj.com3 and
David Pringle at david.pringle@wsj.com4.
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