Nextel Communications Inc. and Sprint Corp. are negotiating a possible merger, according to a source familiar with the discussions.
It was not clear how far the talks had progressed, and some analysts questioned whether a deal combining Nextel, the nation's fifth-largest mobile phone carrier, and Sprint, the third-largest, would be made.
Nextel Communication's walkie-talkie service has made the company popular with business customers.
(Daniel Acker -- Bloomberg News)
A merger would give Reston-based Nextel access to Sprint's high-speed data network, saving Nextel more than $2 billion it has been planning to spend to build its own. It would give Sprint of Overland Park, Kan., access to Nextel's well-regarded management team and its business-oriented customer base, which produces the cell phone industry's highest revenue per customer.
Both companies declined to comment on the merger talks, which were reported yesterday by the Wall Street Journal and CNBC. Nextel's stock closed up 7 percent at $29.81. Shares of Sprint rose 8 percent to $24.28.
A Nextel-Sprint merger could give a combined company the heft to compete with the industry leaders in a time of consolidation. Together, the two companies would have about 39 million subscribers, said Rick R. Black, an analyst with Blaylock & Partners LP, behind Cingular Wireless LLC's 47 million customers and Verizon Wireless's 42 million. Cingular became the biggest wireless-service provider through its recent $41 billion acquisition of AT&T Wireless Services Inc.
Nextel has long been a leader of the Washington area's telecommunications industry. The company was founded in 1987 and grew by acquiring walkie-talkie licenses from taxicab dispatch operators. The cobbled-together system proved to have a big advantage: Nextel's push-to-talk feature, with its instant call connections, was especially attractive to business customers.
In 1995, Craig O. McCaw, a leader in the wireless industry, and his family invested $1.1 billion in Nextel and spearheaded the debt-burdened company's return from the brink of bankruptcy. The firm expanded its product and service offerings. Today it has about 18,000 employees nationwide, including about 2,500 in the Washington area.
Timothy M. Donahue took over as president and chief executive in July 1999 and has worked to raise the company's profile. The company stepped up its Washington lobbying efforts and signed a deal, reportedly worth $700 million to $750 million, to put its name on NASCAR's leading racing series. Nextel also won initial approval from the Federal Communications Commission for a multibillion-dollar swap of broadcast frequencies that would give it a better part of the communications spectrum while eliminating conflicts with public-safety communications.
Some industry analysts said a Nextel-Sprint combination would make sense.
"Both companies have interesting things to bring to the table, and creating a wireless company that could compete with the big boys is an interesting proposition," said Gregory J. Teets, a telecom analyst with A.G. Edwards & Sons Inc. "Nextel is known for having a very good management team, very good customer service," he said. "Sprint brings a relatively advanced network."
Others said the merger would be difficult to pull off.
Because the companies are roughly the same size, the deal is likely to be framed as a merger of equals. Such a deal could be problematic, analysts from Goldman Sachs & Co. wrote in a research report.
"We think that Nextel has more to gain than Sprint and therefore would have to have that value reflected in the transaction," the Goldman report said.
Sprint has a market capitalization of $33.1 billion, compared with Nextel's $31 billion. But Nextel has been much more profitable, earning $1.53 billion on $10.82 billion in revenue in 2003. Sprint earned $1.2 billion on revenue of $26.2 billion in that year.
While the deal would narrow the number of major wireless competitors to four, a source close to federal regulators suggested that it would be likely to withstand regulatory scrutiny. The source declined to be identified because talks are continuing.
Some analysts said they expect more deals in the telecom industry.
"We believe that consolidation within the wireless space is inevitable and it would ultimately lead to greater control of pricing for the wireless providers," Black said.