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FEBRUARY 18, 2004
Where Does Vodafone Turn Now? [Page 2 of 2] MUTUAL WEAKNESSES. Finally, because Nextel has yet to make a significant investment in its next-generation networks, an acquirer could standardize Nextel on its own network technology, says Schildkraut. Another scenario: After saying goodbye to Verizon Wireless, Vodafone might grab for the brass ring with an offer for the combined Cingular-AT&T Wireless, says Greg Gorbatenko, an analyst with Marquis Investment Research. Such a scenario might well be possible if the merged entity encounters as many difficulties as some analysts think likely. For starters, neither one is strong operationally. After the wireless number portability law took effect last November, allowing customers to keep their cell-phone numbers when switching to other carriers in the 100 top markets, AT&T Wireless' churn increased from 2% a month to 3.3%, estimates Peter Firstbrook, an analyst with tech consultancy Meta Group in Ontario. $1 BILLION BOOST. And Cingular has fallen behind other U.S. wireless heavyweights in rolling out advanced networks, says Firstbrook. Moreover, Cingular and AT&T Wireless both concede that the speed of their new network is far below that of Verizon Wireless. Essentially, the merger is combining "two poor operators," declares Schildkraut. While the deal, which is expected to close in the fourth quarter if all goes well, could generate operational and capital-spending efficiencies of about $1 billion next year, those savings could be coupled with disruptions, at least for a while. Legg Mason analysts think the combined company may have to divest operations in markets such as Dallas and Miami to prove to the Justice Dept. that the merger won't stifle competition. Thus, it's a distinct possibility that the combined company, which will bear the Cingular name and be marketed under that brand, will lose some market share. In fact, the integration pains will give Nextel and Verizon Wireless, in particular, a chance to boost their shares by three or four percentage points over the next year, estimates Jonathan Atkin, an analyst with RBC Capital Markets. Near term, price competition in the industry could heat up as other carriers scurry to grab a piece of the Cingular-AT&T Wireless pie, says Meta's Firstbrook. JUST THE START. Existing contracts between AT&T Wireless and its Triton PCS affiliate, which provides wireless service in the Southeast, could force the new Cingular to purchase Triton, says Schildkraut, further exacerbating regulatory concerns. If Cingular stumbles -- or if the merged outfit goes public, as many observers expect -- Vodafone could perhaps mount a hostile takeover. Of course, SBC and BellSouth would launch a formidable defense of their wireless venture. For one thing, Cingular CEO Stan Sigman insists his company won't go public. Moreover, its phone-company owners expect the merger to greatly increase their involvement in wireless -- one of their few growth markets. By 2006, estimates Cingular, wireless will account for half of U.S. household spending on phone services. SBC, which owns 60% of Cingular, expects wireless to increase from 19% to 32% of total revenues over time, thanks to the merger. And that should significantly boost earnings in a few years, once the expense of the integration is over. Whatever else happens, the long-anticipated consolidation of the top six U.S. cellular carriers into three or four players has now begun. And if Vodafone wants to be among the final four, it'll have to be ready to play better offense next time.
 By Olga Kharif in Portland, Ore.
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