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Sprint's Planned Nextel Deal Builds on Wireless Strength

When Forsee took the reins, Sprint's local telephone business was slowly losing steam, and in the first quarter of 2003, its wireless division lost 16 cents a share even as the unit's revenue was rising.

In March, Sprint canceled a separate "tracking" stock that it created in 1998 for its wireless division because the company wanted to present a unified company to investors. But its long-distance and local phone operations have continued to lag.

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Long-distance services brought in $1.81 billion in net operating revenue in the most recent quarter, down from $1.98 billion a year ago. Similarly, net operating revenue from the local phone business slipped slightly to $1.5 billion in the third quarter, down from $1.53 billion in the year-earlier quarter.

Sprint's plan to spin off its local phone business -- which would sever its roots from its founding in 1899 as the Brown Telephone Company of Abilene, Kan. -- may explain why the proposed merger calls for it to control just over half of a combined Sprint-Nextel, tax experts said. Randy Schwartzman of accounting firm BDO Seidman in New York said such a spinoff qualifies as a tax-free reorganization only if it involves assets owned by the parent company for more than five years. That would be the case in a merged company controlled by Sprint but not one controlled by Nextel.

Companies planning such deals sometimes meet with the IRS to seek a "private letter ruling" in which the tax agency indicates what it thinks is the proper tax treatment given a certain set of facts. The IRS declined to comment yesterday on whether it has provided such a letter to Sprint and Nextel.

Today, Sprint owns 7.7 million local phone lines scattered about the country. It's the local phone provider in locations from Las Vegas to Orlando.

Wireless accounts for just over half of Sprint's revenue, or $3.76 billion in the third quarter, up from $3.34 billion in the same quarter a year ago. Its 23.2 million subscribers include the side business it has developed leasing its network to other telecom companies that put their own brands on the service. Qwest Communications International Inc. and Virgin Mobile USA LLC, which is partially owned by Sprint, have deals to use Sprint's wireless network.

Some analysts say the wireless division has been key to Sprint's survival.

"Sprint has gone from the number three long-distance provider to a very strong company that has taken everybody by surprise," said Jeff Kagan, a telecom industry analyst. "MCI and AT&T are struggling, but Sprint is really thriving."

Until March, Forsee was prohibited from seeking mergers or acquisitions because of restrictions from former employer BellSouth, part of a deal crafted by an arbitrator that allowed Forsee to take the Sprint job. Since then, speculation that the company might be looking to strike a deal has been rampant, though Forsee has said the company could get by on its own.

"It is about making the right moves at the right time," Forsee said in a March interview with the Fort Worth Star-Telegram. "Running the same plays in an environment that is as competitive as our industry will not work. You have to be ready to run bold new plays."

Some analysts say that despite the company's push in the wireless business, Sprint, with its 60,000 employees and traditional phone company roots, may be culturally incompatible with relative newcomer Nextel, which has about 18,000 workers.

"Sprint has had more of the mentality of a local phone company, and Nextel has had more of the mentality of a new entrant," said Blair Levin, an analyst with Legg Mason Wood Walker. But, he added, "this is not going to be as difficult as, say, AOL Time Warner."

Staff writer Albert B. Crenshaw contributed to this report.

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