Cingular Reportedly Discussing Merger

Spurred by stiff competition and slowing growth, cell phone carriers Cingular Wireless and VoiceStream Wireless are in exploratory merger talks that could spark the beginning of the industry’s long-awaited consolidation, sources say.

The negotiations, said to be in the early stages, came as Atlanta-based Cingular announced plans Tuesday to lay off 3,000 employees, or about 7.5% of its work force, to cut costs and restructure its sales operations.

Cingular, owned by SBC Communications Inc. and BellSouth Corp., is the nation’s second-largest wireless provider, with about 22 million subscribers in California and 37 other states. Its operations are a complex amalgam of 11 different regional brands. Cingular has a large presence in California because it includes the operations of the old Pacific Bell Wireless.

If the talks result in a deal, a combined Cingular and Voice- Stream would challenge Verizon Wireless for the top spot in the industry. Cingular and VoiceStream have 30.2 million customers combined; Verizon has 30.3 million.

The talks between Cingular and VoiceStream, the nation’s sixth-largest wireless provider, come on the heels of negotiations between VoiceStream and AT&T; Wireless in July and talks between Cingular and AT&T; Wireless in April.

Officials at Cingular declined to comment Tuesday. A VoiceStream spokeswoman did not return a call.

For more than six months, analysts have said the U.S. mobile-phone industry is on the verge of a major shakeout that probably will reduce the number of providers from six to three or four in major cities. Many of the national providers are carrying heavy debt loads because of the huge investments made to build and then upgrade their respective networks.

After several years of record subscriber growth, U.S. companies now face slower growth and price competition from up to five competitors in major cities. Analysts say that is a recipe for consolidation.

“It’s just an overcrowded market.... I think everybody is talking to everybody else right now [about mergers],” said Zach Wagner, a wireless services analyst at Edward Jones. “We won’t see anything tomorrow, but I think in the next six to 12 months we’ll see at least one deal and that will probably lead to others.”

Much of the focus has been on potential deals involving Cingular, VoiceStream and AT&T; Wireless because those three companies either use or have committed to using the same core technology, making their networks easier to integrate.

In addition, VoiceStream is owned by Germany’s Deutsche Telekom, which is under pressure to sell assets to pay down its massive debt. The company has hired J.P. Morgan and Goldman Sachs to advise the company on its U.S. strategy, and European experts have said VoiceStream would be a likely candidate for divestiture.

Cingular and VoiceStream are considered a good fit because Cingular needs additional wireless spectrum in markets where it doesn’t have its own network, and in cities where the growing volume of customer calls is stretching capacity. VoiceStream, a relative newcomer, has extra spectrum and fewer customers and could fill Cingular’s coverage gaps in Indianapolis, Detroit, Philadelphia and Connecticut.

Deutsche’s U.S.-listed shares gained 1 cent to $11.52 on the New York Stock Exchange on Tuesday. Shares of Texas-based SBC and BellSouth both fell on the NYSE, with SBC falling $2.19, or 7%, to $27.68; BellSouth lost $1.21, or 4.5%, to $25.50.

AT&T; Wireless slipped 11 cents, or 2%, to $5.06 on the NYSE. Verizon Wireless and Cingular do not trade publicly. SBC owns 60% of Cingular; BellSouth owns 40%.

The two companies already share their networks in key markets under a deal struck in November 2000, allowing Cingular to use VoiceStream’s network in St. Louis, Detroit and the New York City region, and allowing VoiceStream to piggy-back on Cingular’s network in California and Nevada.

In addition, Cingular, with backing from two relatively healthy phone companies, is more likely to approve a deal that includes some amount of cash--which is what Deutsche Telekom wants most.

Still, Deutsche paid dearly for VoiceStream--about $29 billion--and might get only $10 billion to $15 billion for the unit now, analysts said. For that reason, Deutsche may opt to sell only a portion of VoiceStream and keep a small ownership stake to give itself some gains once the market stabilizes, according to Wagner at Edward Jones.

Those and other factors have led analysts to believe that the major players are engaged in a game of merger musical chairs, with companies posturing and evaluating all the possible outcomes.

Wagner and others say the first two deals will be the easiest to get past regulators, and that also could help determine the ground rules for future deals among the remaining players.

Federal regulators, who recently revoked formal limits on spectrum ownership, are likely to look favorably on some consolidation in the industry, but not too much, according to Anna-Maria Kovacs of Commerce Capital Markets.

“It is likely that even a merger between two of the top four wireless players would pass muster as long as it took the market from six to five players,” Kovacs wrote Tuesday in a research report. “Subsequent deals, however, would become more difficult from an antitrust perspective, because each deal raises industry concentration.”

Regulators also may be more cautious about wireless deals that involve purchases by wireless carriers with ties to regional local phone companies--such as Cingular and Verizon Wireless.

With mobile phones emerging as a viable competitor to local phone lines, regulators might worry that a wireless market dominated by companies owned by large local phone companies “would lessen the ability of the wireless market to impose discipline on local wireline pricing,” Kovacs said in her report.