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One Cingular sensation?
Will AT&T Wireless sell out to Cingular? If not, that's bad news for wireless investors.
February 16, 2004: 11:34 AM EST
By Paul R. La Monica, CNN/Money senior writer

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This is an update of a story that originally appeared on January 20.

NEW YORK (CNN/Money) -- The number of contenders for the Democratic Party's nomination for president is finally whittling down to a more manageable size. The same may soon be said about the number of U.S. wireless companies.

AT&T Wireless is on the verge of selling itself; bids for the company were due Friday, Feb. 13.

Cingular, the company co-owned by Baby Bells SBC Communications and BellSouth, is said to have raised its offer to $38 billion, or $14 a share, according to Reuters. Its original informal offer was for about $30 billion, or $11 a share and Cingular then raised it to about $35 billion, or $13 a share. British telecom Vodafone, which was believed to have submitted a bid of about $35 billion, is expected to match Cingular's $38 billion bid. AT&T Wireless closed on Friday at $11.82.

Japan's NTT DoCoMo, which owns a stake in AT&T Wireless, decided against making a bid, according to reports Friday.

If AT&T Wireless sells out to Cingular, it would knock down the number of major national carriers from six to five. It would also be the first bit of significant consolidation in the wireless sector since Deutsche Telekom (DT: Research, Estimates) bought VoiceStream (now known as T-Mobile) in 2001.

We've been here before

Still, analysts say investors should not rush into the wireless sector since there is still a lot of uncertainty about how things will pan out. For one, speculation about wireless mergers has been running rampant on Wall Street for the past three years.

T-Mobile and Cingular were said to be close to consummating a deal and that never happened. Ditto for T-Mobile and AT&T Wireless. Sprint PCS and Verizon Wireless, co-owned by Verizon and British telecom Vodafone, have also been linked in merger gossip.

The latest takeover chatter has helped lift shares of AT&T Wireless (AWE: Research, Estimates) nearly 50 percent so far this year while Sprint PCS (PCS: Research, Estimates) has surged more than 65 percent. It's highly unlikely that these stocks would be up this dramatically if not for the takeover chatter.

Kevin Roe, an analyst with Roe Equity Research, said both stocks would probably pull back to year-end 2003 levels if an AT&T Wireless merger doesn't materialize, although at this point it seems almost certain that the company will sell out. But even if AT&T Wireless is bought, there's a chance that it could be a negative for the industry.

In addition, there would be challenges to a Vodafone (VOD: Research, Estimates) deal. The company would have to sell its stake in Verizon Wireless. (There has been speculation for some time that Vodafone, which owns 45 percent of Verizon Wireless, wants to do so in order to gain full operating control over a U.S.-based wireless company.)

If Vodafone winds up buying AT&T Wireless, the industry would still be left with six national carriers. That would not alleviate the brutal price competition that has plagued the industry. "The industry needs to go from six to five," said Roe. "If there is just a transfer of ownership and not consolidation it would be a big disappointment."

One isn't enough

And even if Cingular does scoop up AT&T Wireless, it might not change the competitive landscape that dramatically.

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"It only took three long distance companies to drastically drive down long-distance prices," said Guzman & Co. analyst Patrick Comack, referring to AT&T, Sprint and MCI, which is set to emerge from bankruptcy in February.

More mergers would probably be needed in order to lessen competition and it's hard to imagine that taking place. Nextel (NXTL: Research, Estimates) could conceivably buy T-Mobile from Deutsche Telekom but that's a far-fetched scenario since Nextel does not have a sizable cash hoard, said Drake Johnstone, an analyst with Davenport & Co.

And since Sprint PCS is a tracking stock of long distance company Sprint, a buyer for Sprint PCS would probably need to purchase all of Sprint. Given that the long-distance business is one whose best days are behind it, to put it mildly, a deal for Sprint is not too likely either.

Tech Biz
Wireless Phones
Mergers - Acquisitions - Takeovers
By Paul R. La Monica

The only thing that is certain is that Verizon (VZ: Research, Estimates) is in the driver's seat in the wireless industry. With a reputation as having the best phone service, it threw down the gauntlet last month when it announced that it would spend $1 billion to upgrade its high-speed wireless data network.

"If we fast forward two years, the biggest challenge for carriers in the industry is upgrading the technology in their networks," Johnstone said.

To that end, a merger of AT&T Wireless and Cingular would enable BellSouth (BLS: Research, Estimates) and SBC (SBC: Research, Estimates) to lower costs, helping to pay for network upgrades.

However, Johnstone said the combined company would also need to generate enough cash to fund expansion. That's not a given. In particular, AT&T Wireless has had some high-profile problems since November, when the rule allowing customers to switch carriers and keep their phone numbers kicked in.

"Do two wrongs make a right?" said Johnstone.

Investors may soon find out.

Roe owns shares of SBC but his firm has no investment banking ties to companies mentioned in this piece. Guzman's Comack has no position in stocks mentioned but his firm has investment banking relationships with all of them. Davenport's Johnstone does not own shares of the companies mentioned and his firm has no investment banking relationships with them.

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