Cingular Wireless just spent $41 billion on breathing room. But don't expect Verizon Wireless or Vodafone to let their rival catch its breath.
Cingular, the second-largest U.S. mobile operator snatched number three AT&T Wireless with an all-cash offer Tuesday after a weekend-long bidding battle with U.K. giant Vodafone. While the deal is being heralded by analysts as finally bringing about some much-needed consolidation to a fiercely competitive industry, it may not bring as much as some had hoped.
By all accounts, Cingular's decision to offer an extra $3 billion overnight to cinch the deal was right. From the beginning, the carrier owned by SBC Communications and BellSouth was better able to justify paying a premium for AT&T Wireless than Vodafone because of the operational and technical cost synergies it would derive from the deal. And at $15 in cash per share, "Cingular did not overpay," says Andrew Cole, a senior vice president with telecom strategy consultancy Adventis.
"Cingular definitely had more to lose as it would have been stuck in an even more competitive market. We will have a little bit of a healthier climate now," says Roger Entner, a program manager at the Yankee Group, a technology consulting firm.
Vodafone demonstrated its business acumen by not pushing ahead with a deal it ultimately couldn't have justified to its shareholders. Still, the U.K. giant now finds itself in a tricky position, having demonstrated a desire to own more than its 45% stake in market leader Verizon Wireless, the mobile arm of Verizon Communications.
"They had their little fling and now they've got to get back to their wife," says Ken Hyers, a senior analyst with technology research firm In-Stat/MDR. Yankee Group's Entner agrees that the relationship between Verizon Wireless and Vodafone will need some mending. "Your partner showed some sign of infidelity; that is bound to make things a little sour for a while. But Vodafone needs Verizon more than ever now," he says.
Don't expect the British operator to move on another U.S. carrier in the near future. The only interesting operator left for it to buy would be T-Mobile because it uses the same Global Positioning System technology. But T-Mobile is owned by Deutsche Telecom, a fierce competitor of Vodafone in Europe, which makes a deal very unlikely.
The big question now is how much advantage Verizon Wireless will be able to take of the merger's integration period. Based on the number of customers that each has now, an AT&T Wireless-Cingular deal would create the largest U.S. operator with about 46 million customers; Verizon Wireless has roughly 37.5 million subscribers. But, thanks to the advent of cell phone number portability in the United States, Verizon Wireless has been gaining large numbers of new customers fleeing its rivals. At lot more may do so as Cingular and AT&T Wireless come together, particularly if the integration doesn't go as smoothly as planned.
Cingular said today that its President and Chief Executive Stanley T. Sigman will lead the combined company. "The head of Cingular is hard as nails and he's focused," says Adventis' Cole. "He knows what he's doing and he will do it fast." The new group will be called Cingular and the AT&T Wireless name is likely to revert to AT&T, which may decide to lease it to a different carrier in the future.
On the regulatory side, the U.S. Federal Communications Commission will approve the deal, as it has long signaled it would welcome some consolidation in the industry. A report from Credit Suisse First Boston still warns that the pro forma entity might have to divest itself of assets in some markets in Florida, Texas and California, where it would own both the A and B cellular band.
On a conference call, Zeglis said of the combined company, "We're going to have a lot of companies in our rear-view mirror." It will be up to Sigman to drive fast enough to not be rear-ended.