Sprint, Nextel Announce $35 Billion Merger

Approval of the Cingular-AT&T deal is a sign that “we will go through that [regulatory] process at a quick pace with the FCC, Department of Justice and with the states,” Sprint Chmn. Gary Forsee told reporters and analysts: “And we expect the timeline certainly not to exceed what Cingular and AT&T went through,” or about 6 months. The merger is subject to shareholder approval and is expected to close in 2005’s 2nd half, officials said.

Sens. DeWine (R-O.) and Kohl (D-Wis.), the chmn. and ranking member of the Senate Judiciary Antitrust Subcommittee, said they plan a hearing on the proposed merger. “Coming on the heels of the merger between Cingular and AT&T Wireless, the proposed merger -- which would result in the number of wireless competitors being reduced from 6 to 4 in the last year -- is another step towards increased consolidation in the wireless market and therefore merits close review,” they said in a joint statement.

Sprint Nextel would separate Sprint’s local telecom business -- including consumer, business and wholesale operations -- from its other businesses and then spin it off to shareholders in a tax-free transaction after the merger closes, Sprint said. “We plan to unlock significant value by creating a stand-alone local telecom provider which itself will be the largest independent local telephone company in the United States,” Donahue said. The companies said inclusion of Sprint’s North Supply business in the spin-off wasn’t yet determined. Forsee said the local telecom business -- which has 7.7 million local access lines in 18 states and more than $6 billion annual revenue -- would have its own management and board, consisting of an equal number of representatives from Sprint and Nextel. It would have commercial operating relationships with Sprint Nextel for mobile and long distance network services and receive transitional services including corporate support functions. Its corporate hq would be in Kansas City. Officials said once the spin-off is completed, its common stock would be listed on the N.Y. Stock Exchange.

“We also have a truly enviable spectrum position, with 53 MHz of spectrum across the 800 MHz and 1.9 GHz band,” Forsee said. The combined carrier’s wireless network capabilities would include Nextel’s nationwide 800 MHz/iDEN network, Sprint’s national 1.9 GHz/CDMA network and Sprint’s nationwide deployment of wireless EV-DO. Officials said Nextel services, including push-to-talk, would over time migrate to Sprint’s CDMA EV-DO network. The companies plan to deploy new services on their 2.5 GHz combined spectrum holdings that cover 85% of households in the top 100 markets. And Sprint Nextel would utilize Sprint’s fiber wireline network that reaches 60 metropolitan networks and 37 international fiber points of presence.

Forsee outlined what he called “a network technology and evolution path” for the new company. Under the plan, the companies’ individual plans for CDMA and iDEN network build-out would remain “largely unchanged” in 2005, including Sprint’s plans of deploying EV-DO through 2005. On site-sharing, he said, “in 2005 Sprint Nextel will benefit from collocation opportunities across our cell sites.” In 2006, collocation efforts will continue but the combined company will also begin to consolidate its network organization. “We'll take first steps in 2006 to start to plan an iDEN transition to CDMA,” Forsee said: “We'll get to manage the transport networks that we have and complete phase one of our national EV-DO roll-out. We also expect to deploy push-to-talk service that operates seamlessly across iDEN and CDMA networks.” In 2007, the company would be focused on developing VoIP and push-to- talk capabilities with the next generation EV-DO technology Rev. A, he said. And in 2008, it will launch push-to-talk over that network, which will allow it to begin the transition from iDEN to the CDMA network. The company will maintain iDEN for push-to-talk centric customers for security purposes, Forsee said.

“We expect our network migration path which will bring substantial capital savings overtime, and our efforts to streamline expenses as we move 2 companies to one, will allow us to realize the synergies of more than $12 billion,” Forsee said: “We will be a fortune 50 company, and I suspect we'll be moving up the list in the coming year.”

The merger would allow the companies to improve the quality of their network and reduce churn, Forsee said: “We have something over 50,000 tower cites that we'll be obviously looking to optimize, but as a result of that, one plus one will certainly equal more than we have today, which will equal a better, higher-quality network for our customers.” The combined company would be better positioned to improve capacity and lower its overall costs by taking advantage of the efficiency of CDMA, rationalize IT and billing systems, avoid duplicate investments and take advantage of cell site collocation, he said. “But perhaps the most compelling and unprecedented opportunity for us is extending to areas such as push-to-talk, high speed wireless data and integrated solutions by bringing innovative products to the market ahead of our competitors,” Forsee said.

“The combination of the two companies has very little effect on the spectrum swap,” Nextel CEO Timothy Donahue said: “Obviously, we are going to [get on] that in a very quick order. We are expecting to have some sort of ruling on the spectrum swap very soon and I am very hopeful that is’s going to be a positive outcome to the company and I think it will be.” On work to be done over the 3-year spectrum swap, Donahue said: “Obviously, we are going to get some benefit from the 2006-2007 time frame as we introduce a dual-mode phone and take some of the capacity that typically would go on the iDEN network and push it over to the CDMA network. So this combination is very helpful as we are beginning swapping on the 800 MHz level.”

Officials said the merger would result in employee cutbacks. “There is obviously going to be attrition in the employee base,” Donahue said. Said Forsee: “We clearly will have to rationalize overlapping organization, so make no mistake about that -- we are very clear that at the end of the day it’s going to be about rationalizing and downsizing and having a cost-competitive structure going forward. That’s the basis of competition. But we'll be doing that with a lot of care and a lot of attention.” Officials didn’t specify how many people they expected to be laid off. Sprint has 60,000 employees, including about 17,000 in Kansas City, and Nextel has 17,000, with about 4,000 in the Reston area. “We would expect as we spin off our local operation, that will be roughly 22,000,” Donahue said: “So, if you do that math, that would be an organization of Sprint Nextel in about 55,000 range. Overtime, we will rationalize and make decisions about the balance of the organization.”

Most Sprint and Nextel workers aren’t protected by labor contracts. “Neither Sprint nor Nextel has union members,” a CWA spokeswoman said. CWA and other unions have been fighting for years to create labor unions in the wireless industry, but that never happened. “Sprint has [historically] been antiunion,” the CWA spokeswoman said. For example, she said in 1994, Cal.-based La Conexion Familiar -- a Spanish language marketing part of Sprint for log distance -- violated the labor law by firing 200 people. CWA filed charges with the National Labor Relations Board. A few years later, the NLRB found there were 50 labor violations and imposed penalties on the company. But the company appealed the board decision to the U.S. Appeals Court, D.C., which acknowledged that there were violations but overturned the board’s penalties in 1997.

CWA represents some workers in the wireline part of Sprint, and the union spokeswoman said “we will make sure that workers are protected by the contracts… Where Sprint is talking about spinning off its local telephone service, CWA is very concerned that 7 million of rural customers may have to bear a disproportionate share of the company’s debt. We want regulators to look at that very carefully to make sure that rural areas aren’t settled with an unfair share of wireless debt.”

“This merger positions Sprint Nextel for greater success than either company could have achieved alone,” Forsee said. The 2 companies have a combined total equity value of about $70 billion and have more than 35 million wireless customers on their networks, plus 5 million subscribers through affiliates and partners. Officials said they expect Sprint Nextel to have the highest revenue per user in the wireless industry. They estimated total pro forma revenue for the 4th quarter for the combined company at about $40 billion, including about $6 billion generated by the local telephone business. The combined company will have a balanced mix of consumers, business and govt. customers, as well as a strong spectrum position, Forsee said. Donahue said 78% of the revenue at the new company would come from the wireless business.

Forsee would become CEO-pres. of the new company and Nextel CEO Timothy Donahue would be chmn. Sprint COO Len Lauer, Nextel CFO Paul Saleh and Nextel CTO Barry West would keep their positions in the new company. Under the plan, Nextel COO Tom Kelly would be chief strategy officer. Sprint Senior Vp-Finance Steve Nielsen and Nextel Senior Vp-Chief Service Officer Richard Orchard would lead the transition team and be co-chief transition officers. The Sprint Nextel board would consist of 12 directors, 6 from each company, including 2 co-lead independent directors, one from each company. “It’s going to take some time to finalize exactly the way the organization will be structured,” Donahue said: “Over the next 90 days, we'll be each getting very familiar with the other’s management team. We have a process in place, by which we'll do some evaluation and then will begin putting people in their appropriate roles.” The new company would have its executive hq in Reston, Va., and operational headquarters in Overland Park, Kan.

Under the agreement, shareholders of both companies would receive equal value. Nextel shareholders will receive value equal to 1.3 new shares of Sprint Nextel subject to the adjustment of cash consideration payable to Nextel shareholders to provide a pro forma ownership position that will allow for the local wireline spin-off. Aggregate cash consideration would not exceed $2.8 billion. Precise allocation of stock and cash would be determined at the close of the transaction.