Sprint, Nextel move ahead with merger

Just a few days after talks between the two companies were made public, Sprint and Nextel Communications have announced a merger-of-equals agreement to form a combined entity with 35 million customers and valued at $70 billion. As a result of the deal, Sprint plans to spin off its local wireline business.

"I can't wait to put these companies together. I'm champing at the bit," said Tim Donahue, president and CEO of Nextel, who will become chairman of the combined entity, to be called Sprint Nextel.

The deal brings together Sprint's nationwide CDMA network, which is being upgraded to CDMA 1X EV-DO technology and Nextel's iDEN network, which delivers the market-leading push-to-talk service. The merger also brings together the 2.5 Ghz spectrum properties of both companies, which cover 85% of the U.S., and could be used to support other kinds of broadband wireless services. Additionally, it unites Sprint, the early leader in the MVNO wholesale business, with Nextel, the top provider among corporate niche markets. The combined entity will cover more than 262 million potential customers.

"We concluded that partnering is the best way to add scale and scope," said Gary Forsee, chairman and CEO of Sprint, who will become president and CEO of the combined company. "We really view this as a second brand. In our MVNO business, we have looked to partner with brands that could take us into markets where we couldn't go ourselves, and this is the same."

Forsee said the combined entity will realize more than $12 billion in cost and capital investment synergies derived from several sources, including the decrease of network operating expenses through the reduction in the number of cell sites and switches Sprint Nextel will need; the elimination of future capex by extending Sprint's EV-DO data capabilities to Nextel customers, and migrating Nextel’s push-to-talk services to CDMA; the transition of Nextel backhaul and other traffic to Sprint’s long-haul infrastructure; integration of back office operations and other moves.

Shareholders of each company will hold about 50% of the new firm, to be called Sprint Nextel. Existing Sprint shares will remain outstanding and each Nextel common share will be converted into new company shares, and a small per share amount of cash, with a total value equal to 1.3 shares of Sprint Nextel common stock. The exact stock/cash allocation will be determined at closing of the merger to facilitate the spin-off of the local telecommunications business on a tax-free basis. The deal is expected to close in the second half of 2005. The aggregate amount of the cash payment will not exceed $2.8 billion. If the stock/cash allocation was calculated today, it is estimated that Nextel shareholders would receive about 1.28 Sprint Nextel shares and about $0.50 in cash for each Nextel share, according to a statement released by Sprint and Nextel.

In a press conference announcing the merger, the two companies outlined several executive appointments beyond Donahue's and Forsee's. Len Lauer, currently president and chief operating officer of Sprint, will serve as chief operating officer of the new company, and Paul Saleh, currently Nextel’s executive vice president and chief financial officer, will serve as chief financial officer of Sprint Nextel. Tom Kelly, executive vice president and chief operating officer at Nextel, will become the new company’s chief strategy officer. Barry West, Nextel’s executive vice president and chief technology officer, will serve as its chief technology officer. Leading the transition teams and serving as co-chief transition officers will be Steve Nielsen, senior vice president, finance at Sprint, and Richard Orchard, Nextel’s senior vice president and chief service officer.

The companies are evaluating other organizational changes, but Donahue and Forsee both admitted that there will be layoffs resulting from redundancies between the two companies. Sprint currently has 60,000 employees and Nextel has 17,000, and Forsee suggested that as many as 22,000 jobs could be cut from the combined company.

Donahue added, "We’ll evaluate what we have, and we'll begin to put people in the appropriate roles, but this is a growth story, and there will be great opportunities for the employees that are here."

The Sprint Nextel Board will consist of 12 directors, six from each company, including two co-lead independent directors, one from Sprint and one from Nextel. Sprint Nextel will have its executive headquarters in Reston, Va., and its operational headquarters in Overland Park, Kan.

Forsee said Sprint's spin-off of its local exchange business, which could happen about six months after the merger's closing, will include the creation of a separate management team and board of directors, consisting of an equal number of designees from Sprint and Nextel. Agreements also will be put in place to allow the local spin-off to continue selling bundles that include Sprint wireless and long-distance services, Forsee said. Sprint currently has 7.7 million local access lines in 18 states, and had revenues of more than $6 billion over the past four quarters. The spin off is expected to create the largest independent local telco in the country.

Nextel also has a local affiliate through its 32% ownership of Nextel Partners. Donahue said no decisions have been made yet about the ongoing relationship between the companies, but Nextel Partners does have a right to repurchase Nextel's stake in the company.