Wireless Consolidation Stuck in Limbo

Even as wireless carrier stocks rallied last week, the investment community largely ignored two significant wireless events that could influence how quickly consolidation among major wireless players will move and how well operators can survive until major buying sprees begin to happen.

First, hundreds of mobile phone licenses went into legal limbo again when the Supreme Court decided to hear the case involving NextWave Telecom and the FCC. Carriers bid more than $15 billion for licenses the FCC reclaimed from NextWave in 2000. The FCC won't return down payments at least until the Supreme Court rules in early 2003 — and then, only if it loses. This keeps at least one chief consolidator — cash-rich Verizon Wireless — from pursuing major acquisitions until it knows it doesn''''''''''''''''t owe the FCC $8.8 billion in cash.

“The FCC and NextWave can go off into litigation heaven, for all I care,” said Ivan Seidenberg, Verizon Communications'''''''''''''''' president and co-CEO, at the Credit Suisse First Boston investor conference last week in Orlando. “We want our money back, and we want the auction terminated. Let the market decide what the next steps should be [concerning spectrum allocation].”

Meanwhile, Cingular Wireless initiated aggressive nationwide pricing plans, sparking fears that a pricing war, which could threaten to erode average revenue per user, is imminent.

“This industry needs to consolidate to prevent the introduction of irrational pricing, which is what Cingular did,” said William Benton, wireless analyst for William Blair & Co. “Now you have a situation in which you need consolidation, but the fact that Verizon may be on the hook for $8 billion to $9 billion [for NextWave spectrum] will have an impact on what it can do.”

Despite this negative news, wireless carriers'''''''''''''''' stocks emerged from their yearlong slumps last week as investors received assurances from Sprint PCS, Nextel Communications, Leap Wireless and US Unwired that they would meet first-quarter targets (see figure on page 7). But some analysts cautioned investors against aggressive buying in light of the pricing wars carriers are waging to solicit customers in a slumping economy.

Cingular eliminated roaming and long-distance fees when it introduced plans ranging from $30 for 250 anytime minutes and 3500 night and weekend minutes to $200 for 3000 anytime minutes and 3500 night and weekend minutes. Verizon Wireless last month introduced its America''''''''''''''''s Choice plan with no roaming or long-distance costs for as low as $35 for 300 minutes and as high as $200 for 2000 minutes. VoiceStream Wireless already has been criticized for irrationally pricing its plans, charging less per minute than it costs to deliver the service, analysts said.

“We''''''''''''''''re not targeting the traditional national-rate customer,” said a Cingular spokesman. “We are marketing it to everyone, so the cost might not be nearly as much as people are assuming.”

Carriers offer big buckets of wireless minutes in hopes that customers will use more than the allotted number of minutes in their plans and not all of their night and weekend minutes, according to analysts.

WHERE ARE THE DEALS?
Most agree that wireless consolidation among the six nationwide players is needed to ensure the health of the industry. Although market caps for the public companies are near all-time lows, no deals appear imminent because of a variety of economic and compatibility hurdles.
Carrier	Subscribers (in millions)	Other assets	Likeliest partner	Problems
Verizon Wireless	29.4	Available cash	Sprint PCS	Potential CDMA hamstrung by $8.4 billion liability for NextWave spectrum; doesn''''''''''''''''t want IXC
Cingular	21.6	Customer base	AT&T Wireless, VoiceStream	Size, joint-venture structure hinders ability to make moves — tough to value.
AT&T Wireless	18.0	Balance sheet	Cingular, VoiceStream	Potential GSM consolidator may be ready to make deal, logical partners may not
Sprint PCS	13.5	Spectrum	Verizon	Significant debt, may have to be packaged with wireline parent
NEXTEL	8.7	Business base	N/A	Massive debts, iDEN technology tough to absorb
VoiceStream	7.0	Spectrum	Cingular, AT&T Wireless	Parent Deutsche Telekom would take a bath on a deal

“It''''''''''''''''s the only thing Cingular can do,” said Rudy Baca, wireless analyst for The Precursor Group. “They can''''''''''''''''t compete on quality, and they don''''''''''''''''t have the spectrum to compete on services. So they''''''''''''''''re going to compete on price.”

Some carriers charge as much as 65¢ per minute when customers use more than the allotted minutes. But AT&T Wireless, in cautioning the industry about its slightly lower numbers for the first quarter, noted last month that customers are watching their minutes more closely and using more off-peak minutes than expected.

VoiceStream is evidence that a carrier can be a leader in pricing but not in growth or the ability to retain the highest quality of customers, said Jason Bell, wireless analyst for SunTrust Robinson Humphrey.

Economies of scale, cost and revenue generation drives consolidation. Pricing wars only make the need stronger, analysts said. And an FCC victory in the NextWave case likely would mean years of additional litigation, which would impact — if not prevent — any spectrum auction scheduled until the legal issue is resolved. Many believe the ongoing frustration with the inability to purchase airwaves will force carriers to seek more spectrum via acquisition, especially after spectrum caps are abolished at the end of the year.

Indeed, wireless consolidation will come as a result of too many players in the market and too little spectrum, said Duane Ackerman, CEO of BellSouth, which owns 40% of Cingular.

“But I don''''''''''''''''t think you can separate those desires from the fundamental financials of a specific player,” he said at CS First Boston''''''''''''''''s conference. “So what actually comes out of that, I''''''''''''''''m not sure.”

Having the NextWave fiasco financially cloud major consolidation efforts by the largest U.S. mobile carrier, Verizon Wireless, certainly doesn''''''''''''''''t help prospects.

“The fact these companies haven''''''''''''''''t received their deposits back is almost criminal,” said Richard Siber, partner for Accenture. “This impacts carriers'''''''''''''''' liquidity and their willingness to do something with the FCC, which right now they are not holding as trustworthy.”

Meanwhile, carriers such as Sprint PCS and Nextel are crippled by billions in debt and dismal stock prices. The phenomenal merger deals witnessed in the carrier community during the early 1990s happened because of favorable stock valuations. “The market thinks [NextWave] will force consolidation, but I don''''''''''''''''t think the bigger guys are going to buy the smaller guys,” Baca said. “People are reluctant to go after companies with balance sheet issues.”

And there are other hurdles to quick consolidation among major players. Sprint, for instance, has indicated it won''''''''''''''''t let its wireless arm go unless a buyer is willing to take its less attractive long-distance assets as well. Nextel has a jumbled spectrum situation, uses a proprietary technology known as iDEN and will incur significant capital costs in migrating to third-generation services.

Cingular is a joint venture of BellSouth and SBC Communications, and it may be difficult to get both telco giants to agree to the terms of a major merger deal (see figure at right).

Still, consolidation is progressing slowly as Sprint PCS-affiliated companies continue to announce mergers, and companies such as Verizon buy markets from smaller players such as Dobson Communication to fill holes in their footprints. Siber argued that some of the largest operators are attractive targets because their market capitalizations have fallen by as much as 50%. “That is going to be a deciding factor,” he said.

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Additional reporting by Glenn Bischoff, Kelly Carroll and Donny Jackson in Chicago.