Cingular and AT&T Wireless Draw Nearer


Wireless giant Cingular is close to a deal to acquire AT&T Wireless (AWE) in a combination that could kick off the telecom sector's long-awaited consolidation, BusinessWeek Online has learned. A deal is likely within 30 days, according to one industry executive close to the talks. While no agreement is at hand, and talks could still fall apart over delicate issues such as price, the probability of the two companies combining is described as high -- about 75%.

The most likely scenario is that Cingular, which is jointly owned by SBC Communications (SBC) and BellSouth (BLS), would acquire AT&T Wireless, which was spun off from AT&T (T) and has a market cap of $23.2 billion. Shares of AT&T Wireless rose 42 cents, or more than 5%, to $8.55 on Jan. 13 as rumors of a deal began to leak. In Washington, communications attorneys were discussing a possible deal throughout the day, according to one investment adviser. Neither company was immediately available for comment.

The combination of the two companies would create the largest wireless company in the U.S. Cingular and AT&T Wireless have a total of about 45 million subscribers, compared to 36 million for Verizon Wireless. It would remove a player from the crowded U.S. wireless market, where six companies and a number of local and regional players are at odds, pushing down prices. It would also pressure smaller independents such as Sprint PCS (PCS) and Nextel Communications (NXTL) to find partners of their own.

WHO'S IN CHARGE? Several difficult issues must be resolved. The first is price. With its $23 billion market cap, AT&T Wireless is a big fish to catch. Cingular and SBC are considering a public offering to raise cash for the deal, which could end up costing close to $30 billion if AT&T Wireless were to command a standard 30% premium.

That's far from clear, though. AT&T Wireless has been struggling of late. Customer acquisitions for the latest quarter will be much lower than originally expected. It has been hit harder than most by new rules that allow customers to keep their cell-phone numbers when they switch to a new carrier. And AT&T Wireless has lots of exposure to price-sensitive corporate customers, analysts say.

Management issues must also be resolved. As the head of an acquiring company, Cingular CEO Stan Sigman would be expected to lead the combined company. It's not clear what role AT&T Wireless CEO John Zeglis would play. But the combination would be relatively easy from the technological perspective. Both companies use a wireless digital standard known as GSM, which is popular in Europe and other parts of the globe.

CHASING VERIZON. The big risk to this deal may be the arrival of another bidder. T-Mobile, which also uses GSM, is one potential rival. Telecom companies overseas have also been amassing enormous amounts of cash and may be ready to buy.

For its part, Cingular has been racing to catch up with Verizon Wireless. While Cingular has made progress in fixing problems with customer defections, it can't overtake Verizon, which enjoys a larger base and a faster growth rate, without making an acquisition.

If a deal goes through, the consequences could reverberate well beyond the U.S. wireless sector. To keep its lead, Verizon Wireless executives might feel compelled to acquire a company such as Sprint PCS, assuming regulators would allow it. Both Verizon and Sprint use a digital standard known as CDMA.

PAIN FOR MA BELL? A Cingular-AT&T Wireless deal could also force foreign telecoms to rethink their U.S. strategy. Deutsche Telekom (DT), which owns U.S. operator T-Mobile, would suddenly find the stakes in the U.S. much higher. And Vodafone (VOD), which owns a big share in Verizon Wireless, would have to assess whether it wanted to remain a minority player in the U.S., albeit in that market's biggest player.

The deal could also create a headache for AT&T, which still has a marketing agreement with now-independent AT&T Wireless. As a rival of both SBC and BellSouth, AT&T would probably have to rethink its wireless strategy from the ground up.

The combination would be healthy for the telecom sector. While the market has shown signs of recovery, most analysts agree that it still has too many players. Until now, the industry has been too weak to save itself, though. No one had financial strength or the power to risk scaring off investors.

However, cash flow in the wireless sector has been improving. That means telecom's once-mighty merger machine, which powered the M&A scene to great heights during the late 1990s, could finally be stirring back to life. If that happens, the industry could be embarking on a very interesting and transformational year. By Steve Rosenbush in New York


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