Sprint and Nextel forge $35bn telecoms merger

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The US telecommunications giants Sprint and Nextel Communications agreed a $35bn (£18bn) "merger of equals" yesterday to create the country's third-largest mobile phone network, with 35 million customers.

The move will put pressure on Verizon Wireless, America's No 2 mobile player, which is 45 per cent owned by Vodafone. The remaining stake in Verizon Wireless is owned by Verizon Communications, the largest fixed-line telephone company in the United States.

Verizon must decide whether to try to break up the deal with a rival bid for Sprint, or face increased competition from the new company, which will have annual revenues of about $36bn.

The company has spent months considering whether to bid for Sprint. Verizon would be boosted by a successful offerbecause it would be able to increase the amount it could plough into capital spending and marketing in the fast-evolving sector. Some analysts also believe a tie-up would be advantageous because the two share the same technology, unlike Sprint and Nextel.

Others think a bid would be risky. Verizon, which has 42 million customers, could run into competition issues if it attempted to buy Sprint, because together the two companies would control 35 per cent of the market.

Vodafone, which alarmed shareholders this year when it unsuccessfully approached AT&T Wireless, saw £2bn wiped off its value on Tuesday on reports it had given the go-ahead to Verizon to make a bid. The UK company has since said it is "not in discussions" with Verizon about a possible deal. Vodafone shares firmed 0.75p yesterday to close at 140.25p.

If the Sprint Nextel deal goes ahead, the new company will spin off its local phone business so that it can concentrate on competing in the mobile phone market, led by Cingular Wireless, the No 1 provider, and Verizon.

The combined company expects to achieve substantial savings, mainly by streamlining its network operations, reducing overall capital expenditure, migrating Nextel's existing "backhaul" telecoms traffic to Sprint's long-distance network, and consolidating back-office operations including billing and customer care.

"The combined Sprint Nextel is expected to deliver operating cost and capital investment synergies with an estimated net present value of more than $12bn," the companies said.

Gary Forsee, the chairman and chief executive officer of Sprint, will become president and chief executive officer of Sprint Nextel and Timothy Donahue, the president and chief executive officer of Nextel, will become chairman of the new company. Other senior management positions will be split roughly equally between the two merger partners.

Sprint and Nextel are being valued equally in the cash and shares deal and their shareholders will each own about 50 per cent of the new company after the merger.

Under the terms of the proposed deal, existing Sprint shares will remain outstanding and each Nextel common share will be converted into new company shares and a small per share amount of cash, with a total value equal to 1.3 shares of Sprint Nextel common stock.