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Sprint, Nextel ink $35 billion deal

Nextel Communications Inc. and Sprint Corp.  have agreed to merge in a deal that would create the nation’s third largest wireless telephone provider
Company officials speak at Sprint Nextel press conference in New York
Sprint Chairman and CEO Gary Forsee, left, and Nextel President and CEO Timothy Donahue discuss the planned merger of their companies Wednesday.Mike Segar / Reuters
/ Source: staff and news service reports

In a deal that would create a wireless telephone giant with 35 million customers, Sprint Corp. has agreed to acquire Nextel Communications Inc. in a $35 billion deal, the two companies said Wednesday.

The transaction, which had been widely expected, would create a company called Sprint Nextel that would rank No. 3 in the industry with about $40 billion in combined annual revenue, trailing only Cingular Wireless and Verizon Wireless.

Sprint would get access to Nextel’s 15.3 million subscribers, many of whom are business customers, and Nextel would avoid a costly upgrade of its own network. The companies estimated the merger would save them $12 billion in operating costs and network upgrades.

The deal includes a hefty break-up fee of roughly $1 billion, which makes it more difficult for another suitor to emerge with a better offer to acquire either Sprint or Nextel.

The Wall Street Journal reported Tuesday that Verizon was interested in merging Sprint with the wireless service it runs as a joint venture with Vodafone Group PLC. Vodafone denied it had discussed the matter with Verizon.

The merger will attempt to smoothly combine two divergent wireless networks. Nextel has aimed its popular “push-to-talk” walkie-talkie service mostly at business consumers, who account for roughly three-fourths of its customer base. That ratio is flipped at Sprint, which has had a greater emphasis on retail customers and data services.

The combination comes as the cost of wireless calls continue to drop and the industry begins to look like the long-distance business looked five years ago: Three big competitors constantly undercutting each other’s prices.

After completion of the deal, which the companies described as a merger of equals, Sprint’s local telecommunications business would be spun off to the combined firm’s shareholders. The local business accounted for about $6 billion of annual revenues.

The company expects the local business to have roughly 22,000 employees and the combined wireless company to have about 55,000 employees.

But executives said some of those positions would be eliminated. “At the end of the day, it will be about rationalizing and downsizing,” Gary D. Forsee, Sprint’s chairman and chief executive said Wednesday.

Sprint Nextel will have its executive headquarters in Reston, Va., where Nextel is now based, and its operational headquarters in Overland Park, Kan., where Sprint has its headquarters.

Forsee will become president and CEO of Sprint Nextel, and Timothy M. Donahue, currently president and CEO of Nextel, will become chairman of the new company.

The new company’s board would consist of 12 members with six from each company.

“This merger positions Sprint Nextel for greater success than either company could have achieved alone,” Forsee said in a statement.

The deal is subject to approval by the Federal Communications Commission, which will take a "rigorous" look, agency Chairman Michael Powell said Wednesday.

“Whenever we sort of consolidate the market one fewer, we’re going to take a very, very hard and rigorous look at that,” Powell told reporters.

Powell said he received assurances from the companies that the combination would have no impact on the FCC’s proposal to swap airwaves with Nextel to solve interference problems with police, fire and rescue communications. Nextel has yet to agree to that plan.

Sprint currently ranks as the nation’s No. 3 wireless company as well as the third largest in long-distance service. Nextel ranks fifth in U.S. wireless service.

Nextel agreed last month to move its network to a more expensive band of broadcast spectrum because of fears of interference between its phones and emergency response radios.

Now, according to a press release from the companies, Sprint’s next-generation technology will be used for the combined network.

After the takeover, the three largest wireless companies will carry about 75 percent of traffic, according to telecom analyst Jeff Kagan.

At the top is Cingular Wireless, a joint venture between BellSouth Corp. and SBC Communications Inc. that recently completed the $41 billion acquisition of AT&T Wireless.

No. 2 Verizon Wireless is a joint venture owned by Verizon Communications Inc. and Vodafone Group PLC, the world’s largest mobile-phone operator.

Under terms of the deal, Sprint shareholders would get one share of the new company for each Sprint share while Nextel shareholders would get the equivalent of 1.3 Sprint Nextel shares for each of their shares, a small amount of that sum paid in cash.

At Wednesday’s rates, each Nextel share would be exchanged for 1.28 Sprint Nextel shares and 50 cents in cash.

The exact breakdown for Nextel shareholders will be determined later, but the cash payment won’t exceed $2.8 billion.