Telecommunications giant Sprint Corp. is acquiring Nextel Communications Inc. in a $35 billion deal that would create the nation's third largest wireless telephone service provider.
The widely rumored transaction, announced Wednesday, would create a company called Sprint Nextel with about $40 billion in combined yearly revenue and more than 35 million wireless subscribers, trailing only Cingular Wireless and Verizon Wireless.
Sprint would get access to Nextel's 15.3 million subscribers, many of whom are business customers, and Nextel would avoid a costly upgrade of its own network. The companies estimated the merger would save them $12 billion in operating costs and network upgrades.
The combination comes as the cost of wireless calls continue to drop and the industry begins to look like the long-distance business did five years ago: Three big competitors constantly undercutting each other's prices.
The deal has a break-up fee of roughly $1 billion, executives said. That means if another buyer emerges for one of the companies, say Sprint, that suitor would have to pay the fee to Nextel, the party left out.
The Wall Street Journal reported Tuesday that Verizon Communications Inc. was interested in merging Sprint with the wireless service it runs as a joint venture with Vodafone Group PLC. Vodafone denied it had discussed the matter with Verizon.
After completion of the deal, which the companies described as a merger of equals, Sprint's local telecommunications business would be spun off to the combined firm's shareholders.The local telecom business accounted for about $6 billion of their combined revenues.
The company expects the local business to have roughly 22,000 employees and the combined wireless company to have about 55,000 employees.
While these numbers match existing employee totals for both companies, executives said Wednesday jobs would be cut. "At the end of the day, it will be about rationalizing and downsizing," said Gary D. Forsee, Sprint's chairman and chief executive.
In late morning trading, Sprint shares fell 55 cents at $24.55 on the New York Stock Exchange, while Nextel shares fell 56 cents to $29.43 on the Nasdaq Stock Market.
Sprint Nextel will have its executive headquarters in Reston, Va., where Nextel is now based and its operational headquarters in Overland Park, Kan., where Sprint has its headquarters.
Forsee, 53, will become president and CEO of Sprint Nextel. Timothy M. Donahue, 55, who is currently president and CEO of Nextel, will become chairman of the new company.
The new company's board would consist of 12 members with six from each company.
"We will be a Fortune 50 company and I expect we will be quickly moving up the list in coming years," Forsee said at a news conference.
Sprint currently ranks as the nation's third biggest wireless company as well as the third largest in long-distance service. Nextel ranks fifth in U.S. wireless service.
Roughly three-quarters of Sprint's customers are consumers, while roughly three-quarters of Nextel's clients are businesses. Wireless companies prize business customers, who tend to spend more and require less customer service than consumers.
Nextel's "push-to-talk" feature, which allows the phones to be used like a walkie-talkie, has won over business customers. Consumers with Nextel phones will not need new phones and the combined company will offer "push-to-talk" features. The combined company expects to introduce a Motorola Corp. phone with both push-to-talk and broadband connection by late 2006.
Nextel agreed last month to move its network to a more expensive band of broadcast spectrum because of fears of interference between its phones and emergency response radios.
Now, according to a news release from the companies, Sprint's next-generation technology will be used for the combined network.
After the takeover, the three largest wireless companies will carry about 75 percent of traffic, according to telecom analyst Jeff Kagan.
At the top is Cingular Wireless, a joint venture between BellSouth Corp. and SBC Communications Inc. that recently completed the $41 billion acquisition of AT&T Wireless. No. 2 Verizon Wireless is a joint venture owned by Verizon Communications Inc. and Vodafone, the world's largest mobile-phone operator.
The Sprint Nextel merger would put the new company in a better position than either is individually to partner with cable providers as the cable companies push to offer phone service. Analysts expect customers to increasingly demand a package of services that combines Internet access, a home phone and wireless service.
Under terms of the deal, Sprint shareholders would get one share of the new company for each Sprint share while Nextel shareholders would get the equivalent of 1.3 Sprint Nextel shares for each of their shares, a small amount of that sum paid in cash.
At Wednesday's rates, each Nextel share would be exchanged for 1.28 Sprint Nextel shares and 50 cents in cash.
The exact breakdown for Nextel shareholders will be determined later, but the cash payment won't exceed $2.8 billion.