Moving boldly to create the nation's first provider of local, long-distance and cellular telephone service, Sprint Corp. announced Wednesday that it is acquiring Centel Corp. in a $2.85-billion stock swap.
Sprint, the nation's No. 3 long-distance phone company after American Telephone & Telegraph and MCI Communications, said the deal will create a $10-billion company that can offer customers a full array of telecommunication services, both over standard telephone wires or via the emerging wireless technologies.
The merged company, which will retain the Sprint name, will rank among the top 15 local carriers, with about 5.6 million customers in 19 states, and be the eighth-largest cellular network, serving a potential 20 million subscribers.
"Our combined corporation will be able to serve customers no matter what type of telecommunications services they require," said William Esrey, Sprint's chairman and chief executive.
"The whole point is, why should you differentiate between long-distance and local service phone calls, or local calls and cellular calls?" Esrey asked. "You don't differentiate between airmail and regular postal service anymore. Soon, the distinctions will be blurred in phone service as well."
Industry analysts said the merger will expand Sprint's telephone customer list and afford it an important entry into the expanding cellular mobile phone service.
In addition to its worldwide long-distance network, Sprint owns the United Telephone operating companies that provide local telephone service to 4 million customers in 17 states, publishes telephone directories and distributes telecommunications equipment. With 1991 revenue of $8.8 billion, the Kansas City, Mo.-based company employs 43,000.
Centel, which is headquartered in Chicago, is among the nation's top 25 telephone companies, with about 1.6 million customers in six Midwestern states and an extensive cellular network. Centel, with about 9,300 employees, had 1991 revenue of $1.18 billion.
Under the terms of the definitive agreement announced Wednesday, each share of Centel common stock will be converted into 1.37 shares of Sprint common stock. The merger is expected to be tax-free to shareholders of both companies.
Based on Sprint's closing price Wednesday of $24.50 a share, Centel shares were valued at $33.56 each under the terms of the deal. However, Centel stock closed Wednesday at $42.50, indicating that investors had expected the company to fetch a higher price in any merger deal.
Centel's shares, traded on the New York Stock Exchange, rose sharply last January after the company said it was putting itself up for sale to maximize shareholder value.
But analysts expressed surprise at both the deal itself and the price.
"My reaction is I'm extremely disappointed," said an arbitrager at Oppenheimer & Co. who asked that his name not be used. "Their argument is one plus one equals three, but I think we will see many disappointed investors."
"I'm trying to read this as good for Sprint," said analyst Michael Balhoff of Legg Mason Wood Walker Inc. "But I don't know what to think yet. I am surprised at the price." Balhoff said he expects Centel's stock to plummet Thursday when the market opens in reaction to the merger deal, which puts a low value on Centel shares.
The agreement, which has been approved by directors of both companies, still needs to be approved by shareholders and by various regulators.
Esrey predicted that the merger will get the necessary government approvals, including a blessing by the Federal Communications Commission. "We may have some regulatory steps to make and we don't expect a closing for roughly six to eight months. We anticipate no problems," he said.
The companies said they hope to close the deal soon after shareholders of Centel and Sprint meet in late summer.
Jack Frazee, Centel's chairman and chief executive, said the two companies have talked about a possible combination for a couple of years, but negotiations for the current deal were completed during the last several weeks.
"From the outset of this process, we identified the need for greater size to achieve economies," Frazee said. "(We wanted) to have the financial and other resources needed to compete effectively in today's worldwide telecommunications business, and to create a partnership that has long-term potential."