Dreaming of Nextel

AT&T Wireless could be next in line to pursue the carrier Almost a year and a half after World-Com announced it would end its pursuit for Nextel Communications, AT&T Wireless reportedly wants to take a stab at one of the last pure wireless companies. But AT&T Wireless might have to stand in line.

Nextel already may have other suitors from which to choose, including some from overseas. As one one of the only carriers left that focuses solely on wireless, Nextel is a hot commodity. But to move forward with its wireless data strategy and head toward third generation, it needs a partner to afford additional spectrum.

Neither AT&T Wireless nor Nextel would comment on the rumor.

WorldCom had pursued Nextel before trying to merge with Sprint PCS, which did not pass regulatory approval. Perhaps the AT&T Wireless rumor - one neither company outright denied - could bring WorldCom back to the bargaining table.

From a technology standpoint, a merger could make sense. AT&T Wireless' TDMA technology and Nextel's iDEN technology both can make a smooth transition to 3G. But AT&T Wireless clearly is not the only company with its eye on Nextel.

"Nextel is a candidate for anyone," said Eugene Signorini, an analyst with The Yankee Group. "This [recent development] may step up interest in Nextel from other suitors."

If AT&T Wireless were to buy Nextel, it would take more cards off the wireless table in terms of viable wireless acquisition opportunities, he said.

"Sprint and Nextel are two of the only attractive acquisition targets, assuming Voice-Stream is completely off the table," Signorini said.

If AT&T Wireless and Nextel merged, their large amount of combined spectrum possibly would give the new company an upper hand in supporting 3G applications when they are introduced. AT&T owns more than 80% of the tracking stock tied to the performance of AT&T Wireless.

"If they get together and combine their spectrum, they could have extra spectrum [to support] 3G," said Patrick Comack, an analyst with Guzman & Co.

However, Comack said he would be surprised if a merger between the two companies happens because AT&T Wireless shareholders want to avoid the short-term effects of a merger.

"The transaction could cause AT&T Wireless stock to go down at a point where management is trying to generate value for shareholders," he said."This doesn't make sense in light of the fact that the company can use the valuation. If it wants to make a move, it will sacrifice its share price."

In the last year, the stocks of AT&T Wireless and other wireless companies have been blasted by Wall Street. But such short-term effects may not be the main concern of parent company AT&T, which often makes moves based on long-term benefits (see box).

Nextel has 5.6 million domestic subscribers and a total of 6.2 million worldwide. With AT&T Wireless, which has 13 million subscribers, the combined company would have roughly 18.6 million mobile subscribers domestically, still shy of Verizon Wireless' 25 million subscribers.

In addition, AT&T may look to Nextel as a way to secure the future of its wireless data strategy, which becomes more important as the company's core businesses of voice service and long-distance continue to struggle.

Because Nextel targets business customers, more notably those with jobs that require mobility, AT&T Wireless could benefit from having a new audience for its wireless Inter-net, Signorini said.

"Nextel subscribers may be the leading candidates to adopting wireless data applications," he said.

Whoever comes to the table, Nextel needs a partner to participate in upcoming spectrum auctions, and a large carrier such as AT&T Wireless or international operators such as France Telecom or NTT DoCoMo has the deep pockets it needs.

"Nextel has a reason to consider a merger because it needs spectrum," said Drake Johnstone, an analyst with Davenport & Co. "I would be surprised if it is not in discussions with other operators."

But an AT&T Wireless offer, bolstered by promises to finance additional spectrum and to jump-start 3G technology, might not be enough to win over Nextel.

"AT&T Wireless is a tracking stock, and there is no way Nextel would become a part of it as long as it is a tracking stock," Johnstone said.

The only way the merger could work is if AT&T unwinds the tracking stock and makes the merger between AT&T and Nextel - not AT&T Wireless and Nextel - said Johnstone, who also believes Nextel would want to run the operation.