AT&T Wireless: Bidding War, Anyone?

Despite its weaknesses, rivals are itching to buy the cellular provider for its bulk

AT&T Wireless Services Inc. (AWE ) is anything but an industry darling. Dogged by mediocre customer-service ratings, the third largest of six national cellular service providers has seen subscriber growth slow to a snail's pace. The stock has plummeted 70% in four years -- though it has rebounded in recent months thanks to strong cash flow and takeover speculation. The latest financials are weak, too: On Jan. 22, the Seattle company reported a net loss of $84 million for the fourth quarter, on revenues of $3.9 billion.

So it's hardly surprising that the company is looking for suitors. Perhaps more surprising: Rivals are lining up to nab the weakened giant. Already, Atlanta-based Cingular Wireless has made a preliminary offer. Several others, including Japan's NTT DoCoMo (DCM ), Reston (Va.)-based Nextel Communications (NXTL ), and Britain's Vodafone (VOD ), are also mulling bids.

Yet it's easy to see why: With the six big U.S. players struggling to squeeze out profits as they wage fierce price battles, all know that they have little choice but to bulk up or get bought out. AT&T Wireless' rivals are betting that with the right resources and execution, its problems can be fixed. Moreover, an AT&T Wireless deal will likely fuel further consolidation; execs believe that within a year or two the industry will shrink to three or four players. That will have big implications for customer service, prices, and the surviving companies' ability to invest in new technology. "Consolidation is long overdue," says Robert N. Gensler, manager of T. Rowe Price's (TROW ) Media & Telecom Fund. "It will make the industry healthier."

INTENSE PRESSURE. So why is the long-anticipated wireless consolidation finally getting under way? Start with the rule implemented in November allowing users to take their number with them when they switch carriers. That has intensified pressures on weaker players -- especially AT&T Wireless. It has lost out more than any other big rival as unhappy customers have fled. While AT&T says the board made the decision to sell after receiving strong interest from other players, directors also concluded the company isn't strong enough to stand alone. Besides, execs feel AT&T Wireless is in sufficiently decent shape to fetch a good price. While the company had a bumpy fourth quarter, it has strong free cash flow and grew revenues by 8% in 2003, to $15.7 billion. Says CEO John Zeglis: "We did hit some operational rough spots, but the good news is that those issues are largely behind us."

DOMINO EFFECT. At the same time, the buoyant stock market and more forgiving capital markets have given stronger carriers the currency to make acquisitions. That's why analysts give Cingular the upper hand in the bidding. Owned by SBC Communications (SBC ) and BellSouth (BLS ), Cingular can tap its parents' strong balance sheets. Good credit ratings give them the ability to borrow cash at better rates than most rivals. And with a combined $7 billion in free cash flow in the nine months ending in September, they have the heft to swiftly reduce debt. While NTT DoCoMo has an advantage, given its 16% stake in AT&T Wireless, it prefers minority stakes in foreign markets. Nextel can't rival the all-cash offer by SBC and BellSouth.

Whoever ends up with AT&T Wireless, the industry could soon look very different. If Cingular wins out, it will create a behemoth with 46.3 million subscribers. That could force Verizon Communications Inc. (VZ ) to do a deal. One possible target: long-distance stalwart Sprint (FON ), whose Sprint PCS (PCS ) would add 15.8 million customers to Verizon's 37.3 million.

For consumers, fewer competitors means the current price wars will likely wind down, says Kenneth M. Leon of Standard & Poor's. On the other hand, service is expected to improve. Carriers will be able to fill gaps in their coverage and invest in network quality. An AT&T Wireless deal would be a big boost for wireless providers and their customers.

By Roger O. Crockett in Chicago, with Steve Rosenbush

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