Ready or Not, Wireless Merger May Be Coming Sat Jul 27,11:01 PM ET By Tom Johnson and Yukari Iwatani NEW YORK (Reuters) - It is, by all accounts, a terrible time for U.S. wireless companies to merge. Investor angst has hammered the telecom sector particularly hard, leaving cash-strapped firms with little currency to pay for acquisitions. Plus, few are confident antitrust regulators would permit a deal anyway. But a high-level shake-up at Germany's Deutsche Telekom suddenly has many wondering whether VoiceStream, the No. 6 U.S. wireless company, is now in play. If so, the resulting bidding war could test the mettle of top U.S. wireless executives, who will have to weigh the cost of a takeover against missing a chance to fortify their positions in the wireless market. "I don't think anyone knows what's going to happen here," said one senior telecommunications banker who asked not to be named. "This is a terrible time to try and sell a wireless asset, but (Telekom) is under quite a bit of pressure. "Nobody got rid of (former Telekom Chief Executive Ron) Sommer to just leave things the way they were." IN NEED OF CHANGE? Indeed, industry bankers say while VoiceStream floated merger ideas around Wall Street at the end of Sommer's reign, the talks never reached a serious stage. That may now change. Deutsche Telekom's new CEO, Helmut Sihler, is under a strict mandate by the struggling media and telecom company's board to begin reducing its weighty $67.5 billion (67 billion euro) debt load within the next six months. VoiceStream, which boasts more than 8 million customers, was acquired in July 2000, a move spearheaded by Sommer, who envisioned using it as a way to become a leading global wireless provider. But the acquisition created headaches from the beginning, when it took Deutsche Telekom, which is 43 percent owned by the German government, nearly a year to align regulatory and national security concerns and close the deal. By then, the transaction had shed more than 40 percent of its value. The company has succeeded in starting to turn VoiceStream's balance sheet around: the unit posted a 50 percent gain in underlying profits during the recently-completed second quarter. But the operation has fallen far short of original growth projections and is viewed by many as a heavy weight on Deutsche Telekom's shares. Besides, a sale now, even at a loss, might be easier for Deutsche Telekom's shareholders to stomach than it would have been under Sommer, analysts said, since Sihler can do it under the auspicious of fixing former management's mistakes. "VoiceStream is gone," said Todd Bernier, a wireless analyst with Morningstar. "Without question, you cannot be the sixth player. It's bad enough being third, fourth, or fifth." A TEST OF METTLE The real key, bankers say is will Sihler be willing to pull the trigger on a deal that will likely bring less than a third of the $31 billion Deutsche Telekom originally paid for it? And even so, who would want to buy it? Although recent press reports have pointed to talks between VoiceStream and AT&T Wireless , analysts and bankers said the more logical acquirer is Cingular, currently the No. 2 U.S. wireless company. The two companies already share networks in several states, including California and New York, and VoiceStream would provide Cingular with valuable spectrum in several large metropolitan regions. But the real clincher could be that Cingular could provide Deutsche Telekom with a cleaner deal structure. AT&T Wireless is publicly traded and, therefore, would likely look to offer stock for VoiceStream, leaving Deutsche Telekom as a major shareholder in the company -- a scenario neither side likely would want, analysts said. Cingular, meanwhile, is a privately held joint venture between SBC Communications Inc and BellSouth Corp. and could likely pay cash to assume a majority stake in VoiceStream, instantly helping Deutsche Telekom pay down debt. "The most likely scenario is a Cingular tie up and maybe the AT&T side of it is just to get leverage," said William Benton, an analyst with William Blair & Co. "In the end VoiceStream doesn't have a lot of leverage. They need to sell to shore up their balance sheet." But the question of whether either Cingular or AT&T Wireless, the No. 3 U.S. wireless carrier, would ultimately be interested remains unanswered. AT&T Wireless is trading just narrowly off its 52-week low, so its buying or selling power seems limited right now. An even wiser move for Cingular, analysts say, is acquiring AT&T Wireless, but BellSouth Chief Financial Officer Ron Dykes said publicly last month that federal regulators would likely still cast a wary eye on any deal involving the top three carriers. Verizon Wireless is currently ranked No. 1. Still, Dykes did concede antitrust officials could be ready for a merger between, say, No. 2 and No. 6 -- a theory one of the two companies may soon test.