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Sprint and Nextel announced plans for a $36 billion merger Wednesday, creating a new major wireless phone power with a customer base to challenge its two larger rivals.
The companies called the deal a merger of equals, saying shareholders will each own about 50 percent of the new company, which will be called Sprint Nextel. Existing Sprint (down $0.60 to $24.50, Research) shares will remain outstanding and each Nextel (down $0.55 to $29.44, Research) common share will be converted into about 1.28 shares in the new company, as well as 50 cents cash. (For an in-depth look at the wireless industry, click here.)
Using those exchange ratios, the deal represents no premium for Sprint shareholders, who will retain the shares they hold, and about a 9 percent premium for Nextel shareholders, based on Tuesday's closing prices. Shares of Nextel and Sprint were lower.
"It's a great deal for Sprint. They didn't pay much of a premium for Nextel. I'm not sure how they pulled that off," said Greg Gorbatenko, telecom analyst for Marquis Investment Research.
But Gorbatenko said the two companies are not the best of fits with each other, with very different customer bases and business models.
"Going forward, we believe that Sprint will have its hands full. The merger is not a puzzle piece fit," he said. "Nextel users may feel a little jilted since the cult-like following is now mass market, losing the push-to-talk (walkie talkie) focus. We will have to be compelled by the new strategy and integration to maintain our current 'buy' rating on the Sprint stock."
But the top executives at Sprint and Nextel said the two company's strengths fit very well with one another -- Sprint is seen as a leader in wireless data communications and has a stronger presence in the consumer market, while Nextel has been the pioneer in the walkie-talkie service and has its primary customer base among business customers.
"Think about a dual mode phone that will be developed for us by Motorola," said Nextel CEO and President Timothy Donahue, who is to be chairman of the combined company. "From my point of view, it's a very compelling product, it's a differentiated product."
The companies did not give a value of the deal, but using the expected exchange ratio and the Nextel shares outstanding puts the cost to Sprint at about $36 billion. The companies say the value of the combined company is expected to be $70 billion.
The deal still requires approval of shareholders and anti-trust regulators, as well as state utility commissions that license phone service. Reuters reported that Federal Communications Commission Michael Powell said Wednesday that the FCC would vigorously review the proposed purchase as well.
Sprint Chairman and CEO Gary Forsee, who is to be president and CEO of the combined company, said that the companies are confident they'll win regulatory approval, as he pointed to the approval earlier this year of purchase of AT&T Wireless by Cingular Wireless, a joint venture of SBC (Research) and BellSouth (Research). That $41 billion deal created the nation's largest provider, with about 46 million customers.
No. 2 Verizon Wireless, a joint venture between Verizon Communications (Research) and Vodafone Group (Research), has about 42 million customers. There were reports Tuesday that Verizon was weighing its own bid for Sprint, but Vodafone came out with a statement saying it would not be involved in such an offer.
A Nextel spokeswoman said the agreement includes a break-up fee equal to 3 percent of equity value, which would come to about $1 billion.
The companies also say that Sprint's local phone operations will be spun off to shareholders of the new company in a tax-free transaction. That planned transaction, planned for about six months after the merger, will affect the exact exchange ratio of shares and cash for Nextel shareholders.
Sprint was already the third largest wireless phone company before the deal, but it was a distant third with only about 20.1 million customers, compared to more than 40 million for each of the two largest providers, Verizon Wireless and Cingular.
Nextel, with 15.3 million customers, was fifth behind T-Mobile. Sprint and Nextel say they have another 5 million additional subscribers through affiliates and partners, giving the combined company about 40 million customers.
The companies say their customers are worth more than competitors' subscribers, with the highest average revenue per user. That is greatly due to Nextel, which has been a pioneer in the walkie-talkie service on cell phones. Gorbatenko said Sprint's revenue per customer is about $61 a month, just above the industry average, while Nextel's average revenue comes to about $71 a month.
The deal is expected to close in the second half of next year. It is expected to produce operating cost and capital investment savings with a current value of $12 billion, according to the companies.
The companies say net cost savings should come to between $1.2 billion and $1.5 billion in 2006, about $800 million to $900 million in 2007 and then about $1.8 billion to $2.2 billion a year starting in 2008.
Those savings include reducing the number of cell sites and switches, reduced combined sales and marketing costs as well as administrative expense. It did not give any estimates for reduction in staff.
The combined companies would have a staff of about 55,000 after the spinoff of the local phone operations, and although they wouldn't give details of any staff cuts, both Forsee and Donahue acknowledged there will be downsizing.
The company's 12-member board will have six from each company. It will maintain offices at both Nextel's Reston, Va., headquarters as well as Sprint's headquarters at Overland Park, Kan., near Kansas City.