Cingular’s AT&T Wireless Buy Presages More Deals: Telecom pros say the deal could intensify the cutthroat competition among the major providers.

The eleventh-hour triumph by Cingular Wireless in its $47 billion bid to buy AT&T Wireless Services Inc. will likely be a catalyst for continuing consolidation in the $80 billion-a-year U.S. wireless communications industry. But navigating the merger tides could be tricky, experts advise. Cingular, a joint venture of SBC Communications Inc. and BellSouth Corp., beat out Vodafone Group PLC in mid-February with an all-cash offer that is expected to close by year-end if shareholders and federal regulators approve. If the merger goes through it would create the largest wireless carrier in the U.S., with 46 million customers, annual revenues exceeding $32 billion, and coverage in 97 of the top 100 markets. How important was the auction win for Cingular? Roger Entner, a telecom analyst at Yankee Group, says the cost of not winning the auction would have been devastating for Cingular. “It would have been the end of the Cingular joint venture. BellSouth would have cashed out and gone after Sprint or someone else,” he states. Having lost the auction for AT&T Wireless, Vodafone was expected by some experts to unravel its 45% stake in Verizon Wireless. But two weeks after Cingular’s acquisition of AT&T Wireless, Vodafone CEO Arun Sarin said he would maintain the holding for the foreseeable future. While the Cingular acquisition cuts the number of national wireless competitors from six to five, many experts believe that is still too many. “Structurally, the industry still has too many competitors to achieve the economies of scale and the price discipline that it needs,” says Raul Katz, director of the telecommunications practice at Booz Allen Hamilton. Cingular’s acquisition, while a much-needed rationalization, doesn’t truly reshape the industry. “This deal doesn’t change the basic market dynamics,” Entner says, but will increase the cutthroat competition that has existed among the major providers. “Verizon is already exploiting the uncertainty that grows out of any merger,” he says. Efforts to poach AT&T customers have already begun as the remaining five carriers jockey for position and prepare for the next deal, he adds. But, while he shares Katz’s belief that more deals will occur, he sees impediments to many that are widely expected to punctuate the next round of mergers. The Yankee Group analyst says he doesn’t see Sprint Corp. as a target for anyone except possibly a foreign company. But Sprint’s move in early March to combine its two classes of stock was interpreted by some as a move in the direction of enhancing its marketability in the m&a arena. The company said it was eliminating the tracking stock for its wireless unit because a simpler structure would “more closely align Sprint’s capital structure” with its different products. Sprint also said it was reacting to the increasing convergence of wireless and wireline offerings throughout the telecom industry. Some observers noted that the simplified capital structure also makes it easer for Sprint to be a seller or buyer of assets. Entner also sees little likelihood of a deal involving T-Mobile International, a unit of Deutsche Telecom AG and the only operator with a presence on both sides of the Atlantic. It is rolling out branded wireless Internet access services in both regions, which would allow all business travelers to use the same phones on both continents. But Katz says that this international market, while important, isn’t big enough to give any provider a significant strategic advantage. In any case, Entner doesn’t think the industry’s next blockbuster will involve T-Mobile as a seller or a buyer. “Deutsche considers T-Mobile its crown jewel. You don’t sell your crown jewel,” he says. Nextel Communications Inc., while it has an attractive subscriber base and good network technology, has a poison pill and other defenses that would make a takeover difficult. U.S. Cellular Corp. and Alltel Corp. are family-controlled and not believed to be eager to be taken out. According to Entner’s analysis, the next salvo in the expected consolidation in the U.S. telecom industry may not occur for 12 to 18 months. But in the calm before the next wave of deals, senior wireless telecom management must wrestle with some sticky strategic dilemmas, Katz says. One strategy they might pursue would be to increase their companies’ potential valuation, largely by expanding the number of subscribers. This additional bulk will be helpful, this theory goes, whether a given telecom company is a target or an acquirer. A second concern, sketched out by Katz and using the satellite TV industry as an example, is that wireless executives should make sure their company avoids the “third-deal” syndrome. The thinking is that federal regulators would block the third big deal the wireless industry tries to pull off, because of the reduced number of players. This theory assumes that Cingular’s acquisition of AT&T Wireless will go through without significant government objection. A second hook-up among the five remaining national carriers might get looked at more closely but also would be approved. But the government would turn down the third major deal. That would be roughly analogous to the situation in the satellite industry when EchoStar Communications Corp.’s attempt to pick up Hughes Electronics Corp. was blocked. In the satellite TV industry, EchoStar’s bid would have cut the field from two competitors to one. In telecom, assuming a second major deal reduces the number of players from five to four, a third transaction would decrease the number of players from four to three. This is where the government might balk at allowing further consolidation. So Katz says the question that could keep telecom executives awake at night is how to balance the bulking up strategy with the need to avoid being the third deal. “You don’t want to move too soon, nor do you want to find a second deal has occurred and you’re not part of it,” he says. Would-be telecom dealmakers also must watch international markets, where there is no shortage of action either. KPN NV of the Netherlands recently made an offer to buy mmO2 PLC but was turned down. KPN management said it wouldn’t launch a hostile bid but might sweeten its offer. And the motivation for another international asset shuffle is growing directly out of Cingular’s success in winning AT&T Wireless. One of Cingular’s parents, BellSouth, sold its 10-country Latin American division to Telefonica for $5.4 billion. The cash will help pay for the AT&T Wireless acquisition. Cingular’s other controlling partner, SBC, announced plans to sell about 650,000 telephone lines in rural Michigan and Texas to generate up to $1.5 billion, which would presumably be used to finance the AT&T Wireless purchase. But to some industry analysts, these sales also can be interpreted as the fresh signals that landline telephone networks are no longer desirable businesses for the four regional Bell telephone companies. And this realization, if widely accepted, will lead to still more deals. Copyright 2004 Thomson Media Inc. All Rights Reserved. http://www.thomsonmedia.com http://www.majournal.com