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Cingular, AT&T Wireless in Talks

Telecom: A merger would create the nation's largest cell phone carrier and reshape the industry.

April 16, 2002|ELIZABETH DOUGLASS | TIMES STAFF WRITER

Cingular Wireless and AT&T Wireless Services Inc. reportedly are in merger talks to form what would become the nation's largest cell-phone carrier and the first deal in a wave of consolidation that is expected to reshape one of technology's key industries.

Although a deal between the country's No. 2 and No. 3 wireless service providers does not appear to be imminent, analysts said the combination is one of several merger scenarios that could develop this year in wireless.

That's because the rate of growth is slowing markedly, leaving acquisitions as one of the more viable means for aggressive companies to get larger and to protect themselves against pricing pressures.

A deal between AT&T Wireless and Cingular would be complex because Cingular is jointly owned by SBC Communications Inc. and BellSouth Corp. But the combination would create a national giant, with an estimated 40 million mobile phone customers in the United States, dwarfing the 29 million customers at Verizon Wireless, the nation's largest carrier.

"There are no pretty mergers left in wireless ... but it is a much-needed thing within the industry," said William Crawford, a senior analyst at U.S. Bancorp Piper Jaffray. "The climate for wireless carriers is not that good."

Officials at Cingular, SBC, BellSouth and AT&T Wireless declined to comment.

The talks were first reported by Bloomberg News, which said the smaller AT&T was seeking to acquire Cingular. SBC owns 60% of Cingular; BellSouth, 40%.

Privately owned Cingular and publicly traded AT&T Wireless make a good fit because they use the same technologies in their mobile phone systems, and thus could get better equipment prices and share the massive cost of network expansions and upgrades, analysts said.

The deal could especially benefit Cingular, which has been forced to cut deals with competitors to stitch together nationwide service coverage for its customers.

The Atlanta-based company has forged partnerships with AT&T Wireless in some regions and with VoiceStream Wireless in others.

In addition, Cingular has had to postpone a planned initial public offering because of poor market conditions, closing off one potential source of capital for the company's planned expansions and upgrades.

The entire mobile phone business, once booming with record numbers of new customers each quarter, has slowed down significantly in the last six months.

After adding 20 million customers in 2001, the U.S. market is expected to grow by just 18 million this year and by 15 million customers in 2003, according to January estimates from Merrill Lynch.

Certainly, many industries would love to add customers at that rate. But for the mobile phone market, the slowdown comes amid increased competition and expensive network upgrades at all the major carriers.

In addition, the stock prices of many of the once-thriving companies, among them AT&T Wireless, Sprint PCS and Nextel Communications, have fallen precipitously in the last year.

Shares of AT&T Wireless, which have fallen more than 58% in the last year, rose 7 cents on Monday to close at $8.25, SBC shares slipped 53 cents to $33.47 and BellSouth fell 8 cents to $32, all on the New York Stock Exchange.

'Too Much Competition' Seen in Industry

Shares of other wireless companies not involved in the deal were mixed. Sprint PCS gained 6 cents to $10.02 on the NYSE and Nextel rose 9 cents to $4.47 on Nasdaq. But Verizon fell 96 cents to $41.38 on the NYSE.

"It's getting to the point where there [may be] too much competition," said Ray Jodoin, principal wireless analyst at In-Stat/MDR in Scottsdale, Ariz.

"In Phoenix, we now have eight wireless carriers for 3.25 million people.... That doesn't make sense, and there are no financial winners."

Another force driving consolidation is the industry's push to gather enough radio spectrum to accommodate future growth and to carry airwave-hogging services such as picture messaging and mobile Internet access.

Some companies maintain they have enough spectrum for several years, but others are looking to add to their holdings, especially in densely packed cities such as New York.

Federal regulators cleared the way for such wheeling and dealing by agreeing to eliminate next year the current limits on how much spectrum a company can own in each city.

"There are a lot of companies talking to each right now, but nothing big would happen until in 2003, when the spectrum cap gets lifted," said Rashad Barajakly of Williams Capital. "Sooner or later, [consolidation] is going to happen."

To win government approvals for big mergers, carriers will have to prove that prices will not go up with fewer players in the market.

"If all you're trying to do is get together so that you can stabilize or increase pricing, forget it," said John Maxwell, an analyst at Waddell & Reed Financial Inc.

Approval will be easier if the companies can "come up with some kind of a case that says we need this spectrum to be technologically competitive," Maxwell said.

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