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Wireless Players Won't Connect Too Quickly

By Todd Rosenbluth While speculation climbs about possible consolidation in the wireless telecommunication industry, as witnessed by recent articles in the financial press, Standard & Poor's continues to recommend that investors underweight the sector.

Surely, some pairings would make sense. The leading candidates for combination would be AT&T Wireless, Cingular, and VoiceStream. A marriage of Cingular and VoiceStream is the most logical because of their similar technology platform (both use the GSM digital standard). And while Cingular has a large customer base, it needs spectrum. VoiceStream has spectrum but needs customers to better leverage its high fixed costs. AT&T Wireless, which has long used the TDMA analog standard, is converting to GSM, making it a more suitable match for either of Cingular or VoiceStream.

Meanwhile, a Sprint PCS-Verizon hookup might benefit both, since they're the only ones using CDMA technology. A common technology platform would help reduce costly capital expenditures.

LONESOME. Where does this leave Nextel, the other major U.S. player? It doesn't have a likely partner at this time. While the company would doubtless entertain any offers, none are probable because Nextel is the only one using the unique iDEN technology that makes its two-way radio function possible. Nextel's loyal customer base is composed largely of blue-collar small businesses that generate higher revenues per user -- and they stick with Nextel because it's the only company currently with the two-way feature.

While it's hard to pin down exactly who will partner up, S&P thinks that a deal is likely in 2003. But the completion of any combination may be constrained by regulatory issues and by a factor unique to the industry: The operators' ownership structures. Two of the players (Cingular and Verizon) are recent joint ventures between other concerns, so the decision to buy is not easily made, and the parent companies might not want to give up their stake in these potential growth engines so quickly. Sprint PCS's status as a tracking stock could complicate any deal it undertakes. VoiceStream was acquired last year by Deutsche Telekom, and now, although DT might want to unload the company, it might be difficult for the German giant to admit defeat in the U.S. wireless market.

But right now, the industry remains weak, beset by pricing pressures, lack of available spectrum, and a slower pace of net subscriber additions. S&P maintains investment rankings of 2 STARS (avoid) on AT&T Wireless (AWE) and 3 STARS (hold) on Nextel (NXTL) and Sprint PCS (PCS). Analyst Rosenbluth covers telecom services stocks for Standard & Poor's

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