AT&T; Wireless, VoiceStream in Preliminary Talks to Join Forces

In the first sign of consolidation in the once highflying wireless industry, VoiceStream Wireless is in exploratory merger talks with rival AT&T; Wireless Services Inc., industry sources said Wednesday.

AT&T;, the nation’s No. 3 carrier, and VoiceStream, which ranks sixth, are discussing a deal valued at $10 billion that would create the nation’s second-largest mobile phone company, a source knowledgeable about the talks said.

But the negotiations, which are described as preliminary, face significant financial and regulatory hurdles. They also might be complicated by VoiceStream’s plans to undertake a multibillion-dollar upgrade of its wireless network as well as launch a costly new advertising campaign featuring actress Catherine Zeta-Jones.

“This deal wouldn’t be totally surprising--but it’s no slam dunk either,” said Adam Zawel, an analyst with the Yankee Group, a wireless consulting firm in Cambridge, Mass.

A spokeswoman for Redmond, Wash.-based AT&T; Wireless declined to comment. Bellevue, Wash.-based VoiceStream officials did not return calls, although a key company lawyer said he has not been informed of any talks.

The two companies--along with the nation’s four other major wireless carriers--face increasing pressure to scale back their expansion plans and consolidate amid vicious industry price wars that have slashed revenue per minute of mobile telephone use to 14 cents, from 53 cents in 1992.

What’s more, the head of Deutsche Telekom, which owns VoiceStream, is desperately seeking a blockbuster deal that would quiet calls for his resignation.

Ron Sommer, chairman and chief executive of Deutsche Telekom, has been under fire for plunging his company into more than $60 billion in debt thanks to the $31-billion acquisition of VoiceStream and paying nearly $8 billion for new wireless phone spectrum during airwave auctions in Europe.

But any deal between VoiceStream and AT&T; likely would benefit AT&T; more than Deutsche. That’s because VoiceStream already has in place the kind of wireless network AT&T; is seeking to build: global systems for mobile communications, or GSM.

GSM has become the standard in Europe and much of Asia, and AT&T; had planned to spend billions to adopt GSM in order to provide expanded coverage and roll out new second-generation wireless services such as high-speed Internet access.

A merger with VoiceStream might make much of the spending unnecessary.

Investors have been looking for signs of consolidation in the face of a bloody industry price war, slowing consumer demand for mobile phones and costly upgrades to introduce high-speed Internet access and other enhanced services.

But a source close to AT&T; said discussions haven’t progressed very far.

“This deal, if it happens, is going to happen real quickly because of” regulatory issues and other complicating factors, said Michael King, a senior analyst at Gartner Dataquest, a Stamford, Conn.-based research firm.

Among the stumbling blocks will be who will own the merged company. VoiceStream has been pushing for a deal that would make it the dominant shareholder in AT&T; Wireless. But AT&T; Wireless, according to a source close to the company, has resisted such a move and is insisting on absolute control of any merged entity.

Even if a transaction is not completed, the talks between AT&T; Wireless and VoiceStream may inspire carriers such as Cingular or Sprint to seek merger partners.

When asked Wednesday about merger talks involving Cingular, SBC Communications Inc. President William Daley said, “We look at all sorts of possibilities out there, but there’s nothing that we plan to announce about any deal or any discussions we’re having.” SBC owns nearly 60% of Cingular.

AT&T; Wireless shares rose 30 cents to $5.45 and Bonn-based Deutsche Telekom’s U.S.-listed shares fell 14 cents to $10.96, both on the New York Stock Exchange.

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Times staff writer Elizabeth Douglass contributed to this report.