Verizon Bid For Sprint to be Backed by Vodafone (...this throws a kink in it)

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.

 

Verizon and Sprint may be anti-competitive from the cable operators point of view, but I really do not think that it is. I don't think it is likely, but it is possible. Sprint will not end up by itself, nor will Nextel.

If this deal happens though, it really leaves TMO in the dark. I dont know what DT will do if this happens. They are doing fine on their own thus far, but if demand surges for data before they are ready it could be trouble. I dont think it will, and I think they will be fine but that is always an off chance.

As yourdaddy said, Verizon is really concerned about data. All phone companies are. Right now, cable modem beats DSL every time. Cable companies are killing phone companies with VOIP, video and data. They are growing their market share, and they all want to get in to wireless. There has been some talk of Comcast (the biggest cable operator) buying a wireless carrier after their failed ISP. They really want to get in to wireless. Everyone recognizes that in the future one company will provide communications and entertainment over the same medium, the fight is just over who and how.