Can Cingular Leap Into The Lead?
On a windy November day in New York, SBC Communications Inc. Chief Executive Edward E. Whitacre Jr. settles into the stillness of a conference room at the Millennium Broadway hotel to chat about Cingular Wireless LLC, which is jointly owned by SBC and BellSouth Corp. As he carefully folds his 6-foot, 4-inch frame into a petite chair in this dull, cramped room, the Texas native, who always believed bigger was better for his company, makes clear he thinks the same rule holds true in wireless.
In an easy drawl, he explains he won't be satisfied until Cingular, the country's second-largest wireless player, is leading the pack. "I don't think it's any secret we'd certainly like to have a bigger wireless company," he says, sucking on a piece of candy. Fact is, Whitacre wants Atlanta-based Cingular to be tops in everything that matters -- revenues, subscribers, quality, and more. "All that," he says. And by when? "My time frame would be by tomorrow," he says with a chortle, admitting his execs tell him it'll take a little longer. "We constantly discuss that. But it's not years. It's, ya know, over the next number of months."
Months? Getting to the top that quickly through internal growth will be tougher than dancing the Texas two-step with your boots on backward. Cingular has posted two strong quarters since Stanley T. Sigman took over as CEO late last year, but that simply isn't enough. While Cingular gained 745,000 customers in the third quarter, to push its base to 23.4 million subscribers, Verizon Wireless added twice as many, 1.4 million customers, to hit 36 million subscribers. What's more, Cingular needs to make more progress in lowering customer defections and improving its reputation for customer service and quality. "They have not exhibited enough consistency to say they are in the top-tier group," says analyst Craig A. Mallitz of the independent research firm Legg Mason Inc.
What is Cingular going to do? Bet on a Texas-size acquisition. BusinessWeek has learned that the two parent companies have discussed the prospect of a deal sometime in mid-2004 and that the most likely targets are AT&T Wireless Services Inc. and T-Mobile International. Now that a new CEO is in place at Cingular and the company is growing again, the next item on SBC and BellSouth's joint agenda is to find a merger partner, according to an insider at one of the parent companies. No formal talks are under way, and there is a chance no deal will occur. But Sigman, like Whitacre, did little to dispel the notion Cingular is open to an acquisition. "The industry clearly needs consolidation. It needs fewer competitors in the marketplace," says Sigman, a 56-year-old SBC veteran who started working at the company in 1965. "BellSouth and SBC are clearly very bullish about wireless. If there is going to be consolidation, then I expect them to participate -- and not as a seller."
A takeover would turbocharge Cingular's growth strategy. AT&T and T-Mobile are the prime candidates because they use the same wireless technology as Cingular, making their networks relatively easy to combine. Acquiring AT&T would create a company with $9 billion in operating profits, $29.6 billion in revenue, and 29.5% of the U.S. wireless market. That would top even Verizon, which holds a 24% market share. Combining with T-Mobile would give Cingular $6 billion in profits, $21.1 billion in revenue, and 24% of the market. Such a combination would almost certainly touch off industrywide consolidation, forcing smaller rivals such as Sprint PCS Group or Nextel Communications Inc. to find a partner.
Any deal would be daunting. AT&T Wireless and T-Mobile, which is owned by Deutsche Telekom, are valued at $22 billion and $13 billion, respectively, including equity and debt. Because Cingular has no publicly traded stock, an agreement would be particularly complex. Cingular could undergo a reverse merger by combining with AT&T Wireless to create a venture in which SBC, BellSouth, and AT&T's existing shareholders all hold stock. SBC and BellSouth could pay for a deal by swapping their shares for the equity of T-Mobile or AT&T Wireless. The third possibility is the simplest: SBC and BellSouth could raise the cash to buy one of the two companies. Analyst Jeffrey Halpern of research firm Sanford C. Bernstein & Co. says SBC and BellSouth have clean enough balance sheets to do just that. AT&T Wireless and T-Mobile declined comment.
Working out the structure of a deal is hardly a trivial task. Cingular and T-Mobile talked about a deal last summer, but they ultimately couldn't agree on terms.
As daunting as such a deal may be, pressure to find a partner may soon rise. A new rule expected to go into effect on Nov. 24 will allow customers to keep their wireless or home phone number when they switch to a new wireless carrier. By making it easier for customers to switch carriers, the new rule is expected to raise marketing costs, lower prices and profit margins, and exacerbate the need for consolidation. "Wireless-number portability is likely to put more pressure on companies to consolidate, because they will need the benefits of greater scope and scale as wireless becomes more of a commodity," says analyst David Hoover of research firm The Precursor Group.
Even a big-time acquisition won't address all of Cingular's goals. The company ranks third among the six national carriers in network quality, according to a survey of wireless users by J.D. Power & Associates Inc. Cingular is racing to fix that problem by increasing investment in its network. In the past two years, the company has spent nearly $2.8 billion overhauling its network, moving from an older wireless technology to a newer, more efficient standard. The process, which Cingular Chief Operating Officer Mark L. Fiedler says "was not unlike changing the wings on an airplane while it's in flight," means Cingular is able to offer customers the swifter Net service and Web phones that carriers like T-Mobile, Sprint PCS, and Verizon unveiled last year. Now 92% complete, the network upgrade will be finished by yearend 2004.
Sigman knows that to compete with Verizon, he has to lower the number of customers dumping Cingular for rivals. Cingular's churn rate has dropped from 3% last year to 2.8% today. Though that's better than T-Mobile's 3.3% rate, it's much worse than Verizon's 1.9% or Nextel's 1.4%. If Cingular's rate had been 1.9% last quarter, the company would have added nearly the same number of subscribers as Verizon, 1.4 million. Sigman is pushing his team to improve call quality, coverage, and customer service. He has added 3,000 service reps this year and plans to soon debut 24/7 support service. "Our churn results are unacceptable, we understand that," Sigman says. "We're going to break out and distinguish ourselves on network performance and customer service."
Sigman also plans to spark growth through aggressive marketing. Cingular was the first wireless player to offer service to family members of subscribers for a measly $10 a month, a strategy copied by others. Cingular is still the only major carrier that allows users to roll over minutes they don't use one month into a bucket for use the next month. Moreover, Sigman is leveraging Cingular's parent companies. By bundling wireless with Bell South and SBC local and long distance, users can mix those minutes and use them as they wish.
Cingular has shown significant progress over the past six months. If it can continue to tighten up its operations, the added muscle of an acquisition could help it move up to the top tier of wireless players. It's clear Whitacre wants nothing less.
By Roger O. Crockett in New York