AT&T; Wireless to Buy 3 Networks
AT&T; Wireless on Monday moved to eliminate critical gaps in its mobile phone service by agreeing to buy existing networks in San Francisco, San Diego and Houston for a combined $3.3 billion in cash.
Under the three purchase deals, AT&T; will buy the systems from Vodafone AirTouch, GTE Corp. and PrimeCo PCS, a Bell Atlantic Corp. venture. Those companies--all AT&T; rivals--have merged their mobile phone businesses under the name Verizon Wireless, and were required by regulators to shed overlapping holdings in several markets.
The deals represent the first major moves by AT&T;’s wireless group since its debut as a “tracking stock” in a record-setting $10.6-billion initial public offering in April.
AT&T; said the transfers will affect about 1.3 million customers, including nearly 1 million CellularOne customers in San Francisco and about 200,000 San Diego customers of GTE Wireless.
“It’s a great accommodation for both sides of [these deals], and the price doesn’t seem exorbitant,” said Sharon Armbrust, senior analyst at Carmel-based Paul Kagan Associates.
For AT&T; Wireless, which has 12 million customers nationwide, the outright ownership of networks in San Francisco and San Diego will wipe out a troubling cost squeeze that developed two years ago, when the company began selling service plans without “roaming” fees.
Under those offerings, AT&T; mobile customers no longer paid extra roaming fees when they traveled outside their home region.
Although the roaming giveaway is a financial wash as long as customers use AT&T-owned; networks, the company still must pay hefty roaming fees to other companies, absorbing the costs when customers travel onto networks not operated by AT&T--such; as the systems in San Francisco and San Diego.
Because of the roaming expense, analysts have long expected AT&T; Wireless to strike deals to fill those coverage gaps--especially in San Francisco, a popular destination for business travelers.
AT&T; Wireless President Mohan Gyani said he expects the addition of the three markets to reduce the firm’s roaming costs by 8% to 10%. In 1999, about 20% of the firm’s revenue was paid out in roaming charges--or about $1.5 million, according to AT&T.;
The company said the deals probably will reduce the profit of parent AT&T; Corp. by about 2 cents to 3 cents a share this year. The acquisitions also would add about $850 million in annual sales and more than $300 million in yearly cash flow.
AT&T; Wireless’ stock rose $1.13, to $28.75, while parent AT&T;’s shares edged up 44 cents, to $33.88 in New York Stock Exchange trading. Analysts say the new acquisitions also could significantly boost the fortunes of AT&T; Wireless in California, a huge mobile phone market where the company’s wireless brand has been largely absent from the state’s largest cities until recently.
California’s high Internet usage also makes the state a key market for carriers rolling out wireless Internet services.
With the addition of San Francisco and San Diego, AT&T;’s wireless networks could potentially reach 90% of Californians. The AT&T; Wireless brand and services were added in Los Angeles in early 1999, after AT&T; took management control of the L.A. Cellular partnership that remains jointly owned by AT&T; and BellSouth.
“Being able to sell all of California is really huge in terms of market advantage,” said Armbrust of Kagan Associates. “AT&T;’s really been suffering from not being able to have its [no-roaming plans] available in much of California.”
Still, the transitions to come would not be without cost.
The networks it would buy in Houston and San Diego use a wireless technology called code-division multiple access (CDMA), while the rest of AT&T;’s national system is built using a competing system known as time-division multiple access (TDMA).
AT&T; said it will convert the new markets to TDMA, and will spend from $275 million to $300 million for new equipment and other transition costs such as subsidizing the cost of new phones for customers in the affected markets.
“There are awkward parts of this deal, because they are going to have to rip out CDMA networks in San Diego and Houston, and build out TDMA networks,” said Mark Lowenstein, an executive vice president at the Yankee Group, a Boston research firm.
He added that the disruption of switching networks and changing customers’ phones could cause AT&T; to lose some customers during the transition.
In San Diego, AT&T; would take over the wireless service provided by GTE Wireless to about 200,000 subscribers.
AT&T; would become the sole owner of CellularOne in San Francisco, buying out partner Vodafone AirTouch, and changing the unit’s name to AT&T; Wireless.
In Houston, AT&T; would buy the wireless service now run by PrimeCo PCS. AT&T; is part-owner in a competing Houston wireless service that is being run by BellSouth.
AT&T; expects to give up its part ownership in the BellSouth system in Houston in return for BellSouth vacating its partial ownership in AT&T;’s Los Angeles operation.
The company expects to close the three purchases by the end of the year.
*
* STOCK OUTLOOK
James Peltz and Michael Hiltzik debate the outlook for AT&T; Wireless. C7
