WIRELESS COST-CUTTING FORETELLS CONSOLIDATION

Carriers lay off, write off and spin off to strengthen bottom line

Wireless carriers continue to cut costs in an effort to boost their bottom lines and save face with investors, but it may take further consolidation to get the wireless industry back on track.

“The industry really needs some consolidation. Six carriers allow for irrational pricing to become a reality,” said Tim O'Neil, vice president of SoundView Technology Group. “Once the industry hits that, there will be an ugly downward spiral.”

VoiceStream Wireless — a subsidiary of German telco giant Deutsche Telekom — has been blamed for irrationally pricing its plans, charging less per minute than it costs for the carrier to offer the service. Fortunately for the industry, other carriers are not following VoiceStream's example, O'Neil said. “There's no reason to charge 3¢ a minute when there is limited capacity and increased subscriber usage,” he said. “Data is around the corner, and carriers need to increase capacity.”

Coincidentally, the carrier with arguably the best capacity position has been hit the hardest by Wall Street. After Sprint PCS announced it would cut 3000 customer service jobs and close five call centers, stock for Sprint PCS — the wireless unit of Sprint — began its downward slide.

Sprint PCS said the decision to close these centers is consistent with the carrier's goal of improving efficiencies in a competitive industry. The carrier also said its customers are increasingly using automated self-service tools.

When a report began to circulate that the carrier could be the next telecom provider to have difficulty accessing short-term commercial paper, its shares took an even harder hit, falling an additional 15%.

Sprint PCS's stock performance was affected mostly by concern that the wireline business is in trouble. Because the balance sheet for PCS is tied to the wireline group, the same would go for wireless, said Jason Bell, wireless analyst for SunTrust Robinson Humphrey.

“If Sprint PCS were to stand alone, it would be trading at a better valuation,” he said.

The debt concerns surrounding Sprint PCS stem from those that plagued Qwest Communications, which had to drain its bank facility to pay off short-term commercial paper, O'Neil said. “If a company can't go and get commercial paper, that sends a negative signal to The Street.”

Sprint PCS's current woes have created speculation that the carrier could be the next viable acquisition target, most likely for fellow CDMA carrier Verizon Wireless. Sprint has remained adamant about offering bundled services, which indicates it might keep the two groups in the same structure, Bell said.

O'Neil believes Sprint would be open to all options in the midst of such a volatile economy. While BellSouth may want to buy Sprint's wireline and wireless divisions, Verizon might be more interested if it could buy the wireless unit separately, he said.

“It depends on the valuation. One can look at Sprint as an asset as opposed to as a growth story — breaking it up into two components would mean there would be subscribers generating cash and spectrum value,” O'Neil said.

Given depressed telecom stock prices, cash-rich Verizon may have Sprint PCS in its sights. However, regulatory-savvy Verizon CEO Ivan Seidenberg may decide it is safer to wait until his company has secured long-distance approvals before making such a move, said Patrick Comack, telecom analyst for Guzman & Co.

“Verizon is in a position to strike because it is going to have all of its states by the end of the year,” Comack said. “Verizon is sailing through the 271 process and could make an acquisition announcement tomorrow.”

It is not likely that Verizon would hold back because of regulatory issues, O'Neil said.

“It may be different if it was a situation of the largest carrier buying the second-largest, but this would not be the case.”

Meanwhile, industry experts believe Nextel Communications could be headed down the same road as Sprint PCS.

Nextel's shares were slammed after the wireless carrier said its international unit, NII Holdings, would have to take a pretax, non-cash restructuring charge of $1 billion to $2 billion for 2001. While Nextel faces challenges with its own debt levels, the carrier could save money by detaching itself from the international unit and maintain the upper hand on Direct Connect, Bell said.