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AT&T Wireless finds out today who's willing to pay

By Tricia Duryee, Kim Peterson and Monica Soto
Seattle Times business reporters

E-mail this article Print this article Search archive Other links What can you buy for $30 billion — or more? (943K PDF)

Today is the deadline for suitors to submit an offer to buy the Redmond-based wireless carrier.

The company, with roots in McCaw Cellular Communications, put itself on the auction block in late January after a disappointing financial and operational performance in the fourth quarter.

Once AT&T has the bids in hand, it's expected that the acquisition price could be $30 billion or more. That would be nearly twice the value of Boeing's $16 billion purchase of McDonnell Douglas, or three times what Oracle is offering in its attempted takeover of PeopleSoft.

The one Northwest deal in that lofty financial neighborhood is Deutsche Telekom's $29 billion purchase in 2001 of VoiceStream Wireless, the Bellevue company now known as T-Mobile USA.

Analysts have been predicting consolidation in the highly competitive wireless industry for some time, but only with the gradual economic recovery have discussions become more serious.

Verizon Wireless is the only carrier to come close to gaining market share, said Standard & Poor's Kenneth Leon, an equity analyst who does not own AT&T Wireless stock.

"They are dominating the industry, and for competitors to catch up, they have to consider an acquisition," he said.

Companies interested in acquiring AT&T Wireless are Cingular Wireless, Vodafone, Nextel Communications and NTT DoCoMo.

Cingular has been considered the most likely candidate. It has reportedly already made an offer to buy the company for $11 a share, or about $30 billion, and was said to have prepared a larger offer for today.

More recently, interest has grown at Vodafone, the largest mobile-phone company in the world.
 
J.D. Delafield, president of Delafield Hambrecht, a Seattle investment bank, said it could take months for a deal to be completed. Once initial bids are in, parties can sweeten their offers, which could lengthen the process.

But AT&T Wireless' board of directors could choose to complete a deal quickly. The board is set to meet this weekend, with a chance it will make a decision, according to The Wall Street Journal, citing an unidentified source.

Here's a closer look at the presumed interested parties.

Cingular Wireless

If Las Vegas bookies were assessing the situation, a merger between AT&T Wireless and Cingular might have the best odds. Some analysts say it would be "a merger of equals" and describe it as being beneficial to both parties.

Cingular has the second-largest subscriber base of any U.S. carrier and is third-largest in revenue. AT&T Wireless has the third-largest subscriber base and is second-largest in revenue. A merger would create the largest wireless company, surpassing market-leading Verizon Wireless, and would bring together nearly 45 million subscribers and about $30 billion in annual revenue.

One of Cingular's strongest advantages is its well-heeled parents, SBC Communications and BellSouth. Cingular is a joint venture of both companies' wireless divisions, with SBC owning 60 percent and BellSouth 40 percent. Both have relatively little debt and could pull together the cash to finance the deal.

What does AT&T Wireless have that Cingular wants? Spectrum. Cingular suffers from a shortage of wireless airwaves in several key markets. The spectrum licensed by AT&T Wireless would help the company compete against Verizon Wireless.

Both companies also use the same transmission technology, called GSM, or global system for mobile communications. That would make it easier to combine operations and save money without losing customers, analysts said. GSM is the most popular wireless technology in the world, with more than 900 million subscribers in 200 countries.

The companies are huge advertisers and would save hundreds of millions of dollars by combining their efforts. In 2002, AT&T Wireless spent $652 million on advertising and Cingular spent $504 million, according to a recent report by Jefferies analyst Richard Klugman.

AT&T Wireless could provide Cingular with a much-needed income boost. Cingular has been offering low-priced cellphone packages, and its profits have suffered as a result. Its income has declined in recent quarters, to $329 million in the last quarter of 2003, down from $516 million in the same period the year before.

Cingular's bid won a key endorsement when the Communications Workers of America, a union that represents telecom-industry employees, said it would support the deal.

Vodafone

When United Kingdom-based Vodafone indicated it was considering buying AT&T Wireless, many financial analysts asked the same question in different ways:

Why?

Vodafone, which has amassed a wireless empire with phone service in Europe, Asia, Africa and the Middle East, already owns a 44.3 percent stake in Bedminster, N.J.-based Verizon Wireless. Verizon Communications owns the rest.

If Vodafone were to purchase AT&T Wireless, it would have, in effect, traded a minority stake in the nation's leader for full ownership of the No. 3 competitor.

Financial analysts say a purchase would erode Vodafone's profit for several years. And an acquisition would do little to address the expected consolidation of the U.S. mobile market.

Standard & Poor's Leon said that while Vodafone has a controlling interest in many of the world's largest markets, it doesn't in the U.S.

Verizon Wireless represents a good investment, "but it's a minority investment with questions, or uncertainties, about dividends and (partnership) terms going out in the future," he said.

Randy Snyder, a Campbell, Calif.-based telecom consultant, said Vodafone might want AT&T Wireless for two other reasons:

• An acquisition would give it a strategic advantage over Japanese wireless giant, NTT DoCoMo, which competes with Vodafone K.K. in Japan. (NTT DoCoMo owns a 16 percent stake in AT&T Wireless.)

• If Vodafone assumed control over the carrier, it would wipe out NTT DoCoMo's participation in the critical U.S. mobile market.

Meantime, Vodafone shares a key compatibility with AT&T Wireless that Verizon Wireless does not: GSM technology.

Vodafone Chief Executive Arun Sarin has ties to AT&T Wireless with a local dimension. From April 2000 to January 2001, he served as chief executive of Bellevue-based InfoSpace. During that period, InfoSpace struck deals with Vodafone and AT&T Wireless to provide stock quotes, news and e-commerce services to wireless devices.

Vodafone's stock has fallen 11 percent since mid-January, when speculation about its interest in AT&T Wireless emerged.

Nextel Communications

You can't blame the locals for rooting for a Nextel-AT&T Wireless merger, although such a partnership seems distant.

There's some history to consider, and it centers on billionaire Craig McCaw. He was a pioneer in the cellphone business, building McCaw Cellular into one of Washington's largest companies and selling it to AT&T for $11.5 billion in 1994.McCaw first invested in Nextel in 1995, when the company was a dispatch service for taxi drivers. Under his leadership, Nextel moved into cellphones and is now known for phones that also work as walkie-talkies. McCaw resigned from Nextel's board in December.

The two companies were thought to have explored a merger in 2000, according to published reports, but never sealed a deal. Analysts say it's unlikely Nextel can afford to buy the company now; at the end of September, the company had $3.6 billion in cash and short-term investments.

To finance a bid, Nextel would likely have to dilute its stock with an offering or add to its $10.2 billion in long-term debt. Investors may not be happy with either.

"There are better places for up to $30 billion," wrote analysts from Legg Mason in a recent report about the acquisition rumors.

Nextel had 12.3 million subscribers at last report and is known for having the industry's highest average revenue per user — $71 per month, compared with about $50 for the others.

Customer loyalty is also strong: Churn was 1.4 percent in the third quarter, the lowest since 1997.

The company is steadily increasing revenue and reported $7.8 billion for the first nine months of last year. That's up nearly 20 percent from revenue the previous year.

But the biggest factor that could be working against Nextel is its network incompatibility. The company operates on iDEN technology, or Integrated Digital Enhanced Network, and is designed for the walkie-talkie service.

In the short term, Nextel would end up having to manage iDEN as well as the TDMA and GSM networks that AT&T Wireless operates on.

NTT DoCoMo

When Japan wireless giant NTT DoCoMo invested $10 billion in AT&T Wireless three years ago, it sought to replicate the success of i-mode, its wildly popular mobile Internet service.

DoCoMo, which means "anywhere" in Japanese, had amassed tens of millions of subscribers, and most of them were paying additional money to exchange text messages and download pictures and personalized ring tones.

But nearly two years after AT&T Wireless rolled out a similar service in the U.S., the results have been less than flattering. This might be a reason analysts don't expect DoCoMo to bid for AT&T Wireless.

"You can make a good guess as to what the carrier will do by asking: 'Where are they most likely to get an i-mode success story?' " said Daniel Scuka, who runs the research company Wireless Watch Japan. "And I gather they are still keen to get i-mode into the U.S., " he said, referring to the possibility that it would invest in another U.S. carrier that could deploy the service more successfully.

DoCoMo, owned by wireline company NTT, saw its influence spread several years ago, when flush with cash from a public offering, it began investing in other wireless companies around the world.

Aside from a 14 percent stake in AT&T Wireless, it holds minority stakes in wireless companies in Brazil, Hong Kong, Taiwan and Holland.

Since 1999, DoCoMo has operated the most successful wireless-data service in the world. At the end of 2003, 93 percent of its wireless customers, or 40.3 million, were data subscribers.

Industry analysts say both DoCoMo and Vodafone are looking to the U.S. mobile market for future growth.

If DoCoMo were to acquire AT&T Wireless, its primary interest would be expanding its global presence, said Tomi Ahonen, a London-based wireless consultant and author. The U.S. mobile market is one of few places where wireless carriers still have the opportunity to acquire a major player.

Tricia Duryee: 206-464-3283 or tduryee@seattletimes.com. Kim Peterson: 206-464-2360 or kpeterson@seattletimes.com. Monica Soto: 206-515-5632 or msoto@seattletimes.com.

Copyright © 2004 The Seattle Times Company