Nextel-Sprint: Winners & Losers

Nextel-Sprint hook up could make some kit vendors very happy. And a couple quite sad UPDATED 12/11 12:43 AM

December 10, 2004

3 Min Read
Nextel-Sprint: Winners & Losers

Network equipment vendors like Ericsson AB (Nasdaq: ERICY), Lucent Technologies Inc. (NYSE: LU), and Nortel Networks Ltd. (NYSE/Toronto: NT) could be big winners if reported merger talks between Nextel Communications Inc. (Nasdaq: NXTL) and Sprint Wireless (NYSE: PCS) actually lead to the creation of another U.S. mega carrier, according to analysts.

The Wall Street Journal first reported that the two carriers are in talks about a potential merger to create the third largest wireless operator in the U.S. Reports on Friday evening now suggest that Sprint plans to buy Nextel for around $35 billion, mostly in stock with a splash of cash. Neither company has so far publicly confirmed -- or denied -- merger talks. And neither returned calls by press time.

Many think that both carriers could benefit by pooling their forces. Sprint could significantly bolster its business subscriber numbers by teaming up with blue-collar favorite Nextel (see LR Names Investment Finalists). WhileSprint could give Nextel access to a much wider section of the consumer market than the carrier would ever be able to reach on its own.

If the operators join forces to compete against Cingular Wireless and Verizon Wireless, analysts think some equipment providers could be among the big winners.

This is because Nextel runs a proprietary network technology developed by Motorola Inc. (NYSE: MOT) called iDEN, while Sprint (like Verizon) operates a third-generation CDMA network.

"With this merger it would be too expensive to run two separate nationwide networks," says Shelley Chhabra, senior analyst at The Yankee Group.

A merger, she says, would likely decide Nextel's 3G upgrade path, which has been a subject of much attention recently, once and for all (see Nextel Eyes $1B Network Saving).

"I see [Nextel] moving in the direction of CDMA," says Chhabra.

Sprint is already in the midst of a billion-dollar, high-speed data upgrade to CDMA technology, which is whimsically called evolution, data only (or EV-DO to its friends) (see Sprint Invests in EV-DO).

If Nextel merges and moves to CDMA, Chhabra says Ericsson, Lucent, and Nortel are all "likely candiates for new contracts." This could also be good news for the CDMA startup, which licenses its EV-DO technology to both Ericsson and Nortel (see Airvana: The Quiet Startup).

"The most likely loser would be Motorola because they lose the exclusivity they have with iDEN," notes Chhabra.

Motorola refused to comment on the reports of Nextel-Sprint merger talks calling them "rumor and speculation."

A merger could also be a bad sign for wireless broadband startup Flarion Technologies. Nextel has been testing Flarion's technology in a market trial in Raleigh, N.C. (see Nextel Keeps Flarion Waiting).

"It's probably not good news for Flarion," says Craig Mathias, principal at the Farpoint Group. The startup also refused to comment on any potential deal.

And, despite what Mathias sees as "the nice strategic fit" between Nextel and Sprint, it is by no means the only possible combination of U.S. carriers that could combine to form the next mega carrier.

The New York Times reports that number-one wireless carrier Verizon is also mulling the possibility of making a bid for Sprint.

And Mathias notes that there have also been rumors of T-Mobile USA being acquired by Cingular Wireless to create a "GSM powerhouse."

"That's just a rumor... I'm not sure where Cingular would get the money," says Mathias.

Whatever happens, Mathias thinks that U.S. regulators are unlikely to allow much more consolidation in the industry after the next big merger is made official.

"My guess is that this is the last pickle out of the jar, at least in terms of the mega mergers," opines Mathias.

— Dan Jones, Site Editor, Unstrung

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