WASHINGTON (CBS.MW) — Cingular Wireless agreed Tuesday to pay a whopping $41 billion to acquire rival AT&T Wireless, outlasting U.K.-based Vodafone in a weekend bidding war.
Under the agreement, Cingular will pay $15 a share in cash to obtain AT&T Wireless — well above the company’s initially reported offer of around $11 a share, or $30 billion. Cingular was forced to pay more after Vodafone upped its own initial offer Sunday.
Cingular will also assume about $6 billion in AT&T Wireless debt.
On Tuesday, shares of AT&T Wireless
surged $1.96, or 16.6 percent, to $13.78, setting another one-year high. The price has almost doubled since speculation of a merger swept the market last month.
The megadeal begins a long-awaited consolidation in the U.S. wireless sector, shrinking the number of national competitors to five from six. As a result, the merger is also likely to benefit all of Cingular’s major rivals, which will feel less pressure to cut prices.
Vodafone, for its part, retains a 45 percent stake in Verizon Wireless, the country’s largest wireless carrier with about 37.5 million customers.
Yet once Cingular and AT&T Wireless officially tie the knot, the emerging behemoth will assume the mantle of No. 1, with as many as 46 million subscribers.
Executives say the new Cingular will be able to offer wireless service in more areas, speed up expansion of its high-speed Internet service and improve call quality for customers, among other things.
“This company is going to put a lot of people in the rearview mirror. Hey Verizon, can you hear us now?” said AT&T Wireless Chief Executive John Zeglis, referring to the well-known ads of a key rival that tout the quality of its wireless network.
Yet rivals won’t sit still. They could actually lower prices initially in an effort to steal customers from Cingular as it tries to digest AT&T Wireless. And any hiccups in integration are likely to be ruthlessly exploited.
Cingular, the wireless firm owned by BellSouth and SBC Communications, said it expects the merger to close later in 2004, pending shareholder and regulatory approvals.
Regulators are expected to give the deal, which unites the No. 2 and No. 3 U.S. wireless operators, a hard look. Yet analysts widely predict the merger will be approved, since industry competition would remain robust.
SBC executives said they believe they can pay off debt incurred from the merger within five years of its completion. BellSouth executives, meanwhile, said the company has no plans to reduce its dividend to pay for the deal. Both companies raised their dividends in 2003.
“Dividend growth will continue to be a priority for BellSouth,” Chief Financial Officer Ron Dykes said.
Both SBC and BellSouth expect the purchase to reduce profits in 2005 and 2006, but then start to generate added earnings to Cingular in 2007.
On Tuesday, shares of SBC
fell 18 cents at $24.87, while BellSouth
lost 49 cents to $29.06. Vodafone
rose 91 cents, or 3.5 percent, to $26.69.
Other wireless stocks surged. Sprint PCS
for example, leaped 8 percent to $9.95 and Nextel
jumped 6 percent at $28.77.
To offset the Tiffany’s-style price, Cingular said it expects to generate annual savings of more than $2 billion by 2007. Still, the price tag, a 27 premium over Friday’s closing price for AT&T Wireless, drew gasps.
“At $15 a share, it shows you just how excited the bidding got,” said Morten Singleton, an industry analyst at Williams de Broe in London.
The deal values AT&T Wireless at 9.9 times its underlying earnings in 2005, higher than the value for most of its American and European peers.
For instance, Vodafone, the largest wireless carrier in Europe, is valued around five times underlying earnings, said Christian Maher, analyst at Investec Securities in London.
Under the agreement, SBC is expected to contribute around $25 billion and BellSouth $16 billion, reflecting their current stakes in Cingular. SBC holds 60 percent and BellSouth 40 percent.
Still, Cingular was widely viewed as the company with the most to gain by acquiring AT&T Wireless because of the savings it could reap. The pair will be able to merge networks, marketing, advertising and other functions.
“We’ll be a stronger, more efficient and more effective competitor,” Cingular CEO Stan Sigman said in a conference call. Sigman will run the combined company. Zeglis said he expects to depart once the deal is done.
Zeglis won’t be the only person to lose his job. The combined company probably won’t need as many workers, either. For now, Cingular is unwilling to speculate on how many jobs might be eliminated.
“Yes, there will be employees affected by this,” Sigman said. Yet he noted that the industry continues to grow and that both companies have been adding more workers.
Vodafone gives up
Early Tuesday, Vodafone dropped out of the bidding after concluding “that it was no longer in its shareholders’ best interests to continue discussions.”
Shares of Vodafone had dropped 6 percent since late January, when reports started to widely circulate that Vodafone was mulling a bid.
Other potential bidders, such as DoCoMo
and Nextel Communications
reportedly bowed out as the asking price for AT&T Wireless escalated.
Vodafone could still try to acquire another U.S. carrier, such as Deutsche Telekom’s T-Mobile unit. Or it could even sell its Verizon stake and exit the U.S. market entirely. See full story.
DoCoMo, for its part, still owns a 17 percent stake in AT&T Wireless, but the company plans to sell its shares to Cingular, according to several press reports.
Meanwhile, Nextel is preparing to roll out a high-speed wireless service in a bid to extend its technological lead over rivals. The company, with 13 million customers, has stayed ahead of competitors by targeting lucrative business customers attracted to Nextel’s unique features.
Still, rivals are trying to catch up by offering copycat technologies, such as a new “push-to-talk” feature that mimicks walkie-talkies.
View more information: https://www.marketwatch.com/story/cingular-to-acquire-att-wireless