More bad news came on Apr. 23, when AT&T Wireless (AWE
) reported a first-quarter loss of 2 cents per share, vs. an expected profit of 1 cent and a 5-cent profit in the year-ago quarter. It brought in revenues of $3.75 billion -- flat year-over-year, but down 4% sequentially. Analysts attribute the loss to aggressive price cutting aimed at retaining customers.
Could these numbers jeopardize the marriage between AT&T Wireless and No. 2 wireless outfit Cingular? Don't bet on it. More likely, the pressure will build on Cingular and AT&T Wireless to accelerate the deal well before yearend, so that AT&T can take steps to stop any further erosion. Even if the merger closes in the fourth quarter as originally expected, the AT&T Wireless brand name reverts to AT&T (T
), which could immediately introduce a new wireless service under that same name. That could cause confusion in the marketplace, says Andrew Cole, an analyst with wireless consultancy Adventis in Boston, and result in truly disastrous subscriber losses for the Cingular-AT&T Wireless combo.
MORALE PROBLEMS. At heart, the merger to create the largest wireless-service provider in the U.S. has little to do with the financial performance of AT&T Wireless. Cingular -- and especially its parents, Baby Bells SBC Communications (SBC
) and BellSouth (BLS
) -- covet AT&T Wireless for its networks, wireless spectrum, and coverage. They need it so badly that the deal's price, estimated at $41 billion, is unlikely to be renegotiated, despite recent speculation on the Street, says Michael Mahoney, a senior portfolio manager for the EGM Capital hedge funds in San Francisco. (AT&T Wireless stock has been hovering at around $13.90 a share ever since the merger was announced in February.) Cingular knew that its rival's subscriber base was hemorrhaging well before then, Mahoney says.
Indeed, subscriber losses may be the least of Cingular's worries. In addition to the possibility of AT&T launching a new service, top execs are leaving AT&T Wireless in droves. Morale frequently takes a hit at companies caught in the twilight zone of a not-yet-completed merger.
So what will drive this merger forward? Plenty:
Turbocharged revenues for the parent Bells: Their core business of local-phone service is shrinking as subscribers opt for wireless service instead of second phone lines -- or drop regular phone service altogether in favor of wireless. To keep growing, BellSouth and SBC need to boost revenues from wireless services. With AT&T Wireless in the fold, they would enhance their dominant telecom services inside and outside their markets almost overnight, say analysts. SBC says it expects to see wireless as a percentage of total revenues rise from 19% to 32%.
Jewels in the skies: The AT&T Wireless network uses the GSM standard (global system for mobile communications) -- an enhanced system that enables customers to send photos from cell phone to cell phone. Cingular's GSM network isn't as extensive, and it would have to spend far more to build out its own network than it will spend to buy an existing system. Plus, Cingular will get additional wireless spectrum from AT&T Wireless, which it can use to ensure seamless coverage. And it will pick up the remaining corporate-customer base that AT&T Wireless is known for.
Did somebody say synergy? When merged, the outfits -- which boast combined 2003 revenues of $32 billion -- should generate massive economies of scale. The result: more than $1 billion in operating- and capital-spending savings in 2006, and $2 billion in annual savings beginning in 2007, according to Cingular estimates.
Of course, if the drop in subscribers starts to spiral and revenues suffer commensurate damage, Cingular might still have to rethink the deal. The merger contract contains a "material adverse effect" clause that would allow Cingular to pull out if AT&T Wireless subscriber losses go into millions.BETTER PRICING. And just as important, BellSouth and SBC will have to solve huge integration issues to make this merger work and to catch Verizon Wireless, which is adding roughly 1.5 million subscribers a quarter. That task is made much harder now that customers are fleeing AT&T Wireless at such an alarming rate.
Many analysts, however, believe AT&T Wireless has seen the worst. The mini-stampede was prompted in part by the federal wireless number portability law that took effect last November, which allows cell-phone customers to take their numbers with them when changing carriers.
As high-end customers in particular flocked to rivals Verizon Wireless (the current No. 1 mobile carrier) and No. 4 Sprint PCS, (part of Sprint (FON
), AT&T Wireless' churn peaked in January. But the rush petered to a trickle in March, according to AT&T Wireless. Todd Rethemeier, an analyst with Sur Terre Research, still expects the carrier to see net losses of 100,000 subscribers in the second quarter, but then start gaining users in the second half. Rethemeier expects the 2004 customer base to finish essentially flat with 2003's.
That assessment might be a bit rosy. A February survey of more than 1,000 business users conducted by tech consultancy In-Stat/MDR revealed that 14% of AT&T Wireless's corporate customers were planning to leave -- nearly twice the defection rate that other carriers are likely to experience. Many businesses fear disruptions and changes in pricing that could come as a result of the merger.
TOO HIGH? Still, AT&T Wireless is fighting back. On Apr. 14, it announced an end to roaming charges for most customers -- an offer made possible by agreements with Cingular and recent network improvements. Six months ago, its charges were among the industry's highest, but now its pricing is highly competitive, says Pete Wilson, CEO of consultancy Telwares in Destin, Fla., which helps corporations renegotiate their wireless contracts. Also in April, AT&T Wireless launched a multimillion-dollar ad campaign to promote its network upgrades and quality.
Perhaps the worst-case scenario at this point is that Cingular will end up paying too much. Last fall, analyst Rethemeier figured AT&T Wireless stock was worth no more than $7 a share before the deal was announced. And even with the anticipated synergy gains, Cingular should have paid only $10 to $12, vs. the $15 offer, to assemble the combo, Rethemeier estimates. Now, Cingular needs the Justice Dept. and the Federal Communications Commission to approve the merger -- and fast. By Olga Kharif in Portland, Ore.