NEW YORK (CNN/Money) -
One message is being heard loud and clear amidst the crackles and hisses in the wireless industry: There are way too many carriers and the sector won't get better until some go away.
There are six major national wireless companies and some would argue that Alltel, which caters primarily to rural customers, is a strong seventh. That is great for consumers, as the carriers aggressively cut rates to lure customers.
But price wars aren't good for business -- just ask the airlines.
"Consolidation is needed. What we have going on right now is ruinous competition," said David Hoover, an analyst with Precursor Group, a telecom research boutique.
Investment bankers, can you hear me now? Good. But if only it were that easy.
Nobody's buying
None of the carriers is in a good position to make acquisitions. "Money's still tight and cash is king," said Greg Gorbatenko, an analyst with Loop Capital Markets, a telecom research firm. "Any acquisition would get punished by Wall Street."
The three Baby Bells are the most likely acquirers but they all have huge debt loads, so fixing their balance sheets is the priority, said Gorbatenko. Verizon (VZ: Research, Estimates) co-owns Verizon Wireless with British telecom Vodafone. BellSouth (BLS: Research, Estimates) and SBC Communications (SBC: Research, Estimates) own Cingular. Gorbatenko doesn't own any stocks that he follows and Loop Capital Markets has not performed investment banking for any of them.
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Nextel is thriving in a rough market for wireless stocks.
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In addition, the Federal Communications Communication's recent ruling on how much longer the Bells have to continue leasing access to their lines to competitors at discounted prices was a blow to the Bells. The FCC kicked the matter to the individual states instead of granting the Bells immediate relief.
Hoover said that a more favorable ruling for the Bells might have helped to spur some consolidation but that these plans are now probably on hold. Hoover doesn't own any telecom stocks and his firm does not have an investment banking division.
What's more, Gorbatenko said that SBC's apparent interest in acquiring DirecTV from Hughes Communications makes it less likely that Cingular would be able to pursue a major wireless deal as well.
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Two pure plays, AT&T Wireless (AWE: Research, Estimates) and Sprint PCS (PCS: Research, Estimates), are possible takeover candidates because their stock prices have plummeted during the past year. AT&T Wireless is probably less of a target since it has shown some signs of improvement lately. It reported a loss in the fourth quarter but it is expected to be profitable and cash flow positive this year.
But Sprint PCS's situation is especially bleak. The company is expected to lose money in 2003 and 2004. Making matters worse, Gorbatenko said that potential acquirers could probably afford to wait even longer before scooping in because its stock price might head lower.
Sprint PCS is having major problems with its affiliates, which are regional companies that sell the Sprint service to customers. The affiliates, which typically own and operate wireless networks, pay Sprint fees to use the company's brand name. AT&T Wireless also uses some affiliate partners to offer its service.
One of Sprint's largest affiliates, iPCS, which is owned by AirGate PCS (PCSA: Research, Estimates), filed for bankruptcy in late February. Patrick Comack, an analyst with Guzman & Co., said that several of Sprint's other affiliates, such as Alamosa PCS (APS: Research, Estimates), US Unwired (UNWR: Research, Estimates) and Ubiquitel (UPCS: Research, Estimates), are also teetering on the edge of bankruptcy.
At the very least, the stocks are in danger of being delisted since they all trade for less than $1. These affiliates sell wireless service under the Sprint name. Comack does not own any stocks he covers but Guzman has done investment banking for Sprint PCS, AT&T Wireless, Verizon, and BellSouth.
The only wireless company that is actually clicking right now is Nextel (NXTL: Research, Estimates), which is known for its walkie-talkie-like Direct Connect feature. Shares of Nextel have nearly tripled during the past 52 weeks. The company has pared back its debt load and has enjoyed healthy subscriber growth. As a result, Nextel is profitable and free cash flow positive.
But because of this recent success, one of Nextel's key investors, semiconductor and handset maker Motorola (MOT: Research, Estimates), has decided to take some profits. Motorola announced on Tuesday that it sold 25 million shares of Nextel. It still owns 83 million shares however.
For now, Nextel is unique because it can differentiate itself on something other than price. But Gorbatenko said that might change in the near future. Alltel, AT&T Wireless, Verizon and Sprint PCS are expected to roll out their own walkie-talkie phones before the end of this year.
Limited merger possibilities
Compounding consolidation efforts is the fact that the number of merger combinations is relatively limited due to competing wireless technology platforms.
AT&T Wireless, Cingular and T-Mobile (owned by Deutsche Telekom) all run on the global standard for mobile communications (GSM) while Verizon, Sprint and Alltel (AT: Research, Estimates) run on what is known as code division multiple access (CDMA). Nextel is a bit of a wild card since it has its own standard, called the Integrated Digital Enhanced Network, or iDEN. This standard is closer to GSM than CDMA.
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So for example, a Verizon-Sprint merger would make sense, but not a Verizon-AT&T Wireless combination. Cingular could easily mesh with AT&T Wireless, but not Sprint.
All in all, the wireless sector faces an almost impossible-to-solve dilemma. Consolidation is needed in order for the sector to get better. But the sector needs to get better before consolidation is likely to happen.
It looks like there's going to be a lot more static for the wireless industry in the months ahead.
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