GSM puzzle almost complete

DT-backed VoiceStream acquires Powertel, expands footprint

News that the proposed Deutsche Telekom/VoiceStream Wireless entity would acquire Powertel really was not surprising. VoiceStream was expected to buy Powertel to fill in the Southeast portion of its U.S. footprint and advance the presence of GSM technology throughout the country. But perhaps somewhat unforeseen - at least before several international operators announced they would enter the U.S. wireless market - was that it would take a foreign entity like DT to make VoiceStream's plan a reality.

Even before DT receives regulatory approval for its VoiceStream acquisition, the U.S. operator went public with plans to acquire Georgia-based Powertel for $5.75 billion. The acquisition will give VoiceStream a total of about 250 million pops.

Once its merger with DT is complete, VoiceStream will use DT stock to buy Powertel. The transaction actually is split into two parts, with Powertel shareholders exchanging each share for 2.6 shares of DT stock on the assumption that the DT/VoiceStream deal closes. If DT is denied approval to acquire VoiceStream, VoiceStream still will acquire Powertel with the $5 billion DT already agreed to invest to gain about a 20% ownership stake in VoiceStream. The investment, which is expected to pass regulatory approval in the next several weeks, will go to VoiceStream even if the merger is not realized. If approved, the DT/VoiceStream merger is expected to close by late first quarter or early second quarter.

For VoiceStream, the Powertel acquisition represents the last big piece involved in rolling up the company's strategy for GSM, said John Stanton, chairman and CEO of VoiceStream. "We view the merger as a logical and economic [way] to expand our business into the Southeast," he said. "Our next challenge is to raise money for the next [spectrum] auction scheduled for July and acquire key spectrum in California."

The Powertel addition gives VoiceStream the ability to offer service throughout the country, with a big hole remaining in the San Diego market.

However, gaining a larger footprint might not be enough for VoiceStream to compete on a nationwide level, said Rob Norcross, a vice president of Mercer Management Consulting. "Filling out a footprint was a game people were playing three or four years ago," Norcross said. "The whole focus on GSM is misplaced."

VoiceStream would have found a way to buy Powertel even if DT did not enter the picture, Norcross said. He does maintain, though, that spreading the GSM standard across the states will not matter if the carrier does not find a way to improve its standing as the No. 6 wireless carrier.

"Besides another acquisition, we need to see some kind of strategy that is different. It will help [VoiceStream] to have DT behind it, but it won't be enough," he said.

One possibility is VoiceStream increasing its emphasis on data, Norcross added.

In the meantime, VoiceStream's expansion plans will include bidding on FCC auctions of local wireless licenses and making further acquisitions.

Although the $45.7 billion VoiceStream/DT merger has yet to transcend regulatory hurdles, Stanton anticipates that it and the Powertel acquisition will be approved because of their overall importance to consumers.

"I fully expect the DT transaction to close," he said. "Sen. [Ernest] Hollings [D.-S.C.] is an important member of Congress, but he is not a chairman of the key committee... and every member will have the opportunity to consider the issue separately."

The South Carolina senator has been a loud opponent of foreign corporations acquiring U.S. phone companies. He is against the DT/VoiceStream merger and remains against any other takeovers that the German operator might seek, including Powertel.

Ironically, the possibility of VoiceStream emphasizing data flies in the face of its past. In fact, when the DT merger was announced, some analysts were skeptical about the German telco's decision to chase VoiceStream because it lacks national brand recognition and a mobile data offering. With a larger footprint and DT's deep pockets behind it, though, VoiceStream could be better positioned to gain more of a competitive edge in the U.S. wireless market. Without DT, VoiceStream may have had a more difficult time even exploring a national expansion.

"Powertel is expensive, so it was easier for VoiceStream to go after it knowing it has a company with deep pockets behind it," said Scott Cleland, CEO of The Precursor Group. "Knowing DT is there changes the complexion of the Powertel acquisition."

In related news, Finland-based Sonera announced that it would sell its stake in Powertel to the VoiceStream/DT group for $786 million.