WIRELESS MERGERS EYED FOR CLUES ON REGULATORY APPROVAL PROCESS

AT&T Wireless confirmed Thurs. it was for sale, saying its board had agreed to explore “strategic alternatives.” The carrier said it had received “significant interest” from several companies, but cautioned it had no assurance any deal would be completed. The company’s board reportedly agreed earlier this week to a formal auction process for prospective suitors, which are said to include Cingular Wireless, Nextel, NTT DoCoMo and Vodafone (CD Jan 14 p7). A marriage of AT&T Wireless and Cingular would create a new top wireless player with 45 million subscribers, surpassing current No. 1 carrier Verizon Wireless, which is a joint venture of Vodafone and Verizon.

FCC wireless merger reviews used to be a fairly straightforward process using spectrum as the main input factor with a cap of 45 MHz for each market. With the lifting of that ceiling Jan. 1, 2003, the Commission and its Wireless Bureau had weighed the release of wireless merger guidelines, a move that some carriers opposed as potentially too restrictive and that the agency eventually abandoned. Compared with spectrum cap evaluations, the FCC now conducts a more sophisticated analysis that considers input factors such as spectrum and facilities and output factors such as market share and pricing strategy.

As part of its analysis, the FCC is expected, as a legal matter, to view wireless service in the context of a nationwide market, which hasn’t been done before, an agency source said. Such a definition is expected to be covered in an order at the Commission level, rather than from the Wireless Bureau.

Some analysts said they didn’t expect FCC merger review to be widely different from the Dept. of Justice’s competitive analysis, although the FCC retained public interest obligations as part of its review process when the spectrum cap was lifted. “I don’t think there is going to be meaningful differentiation,” Precursor Group analyst Rudy Baca said: “The Commission still retains its public interest review.” Baca said an FCC analysis based on a national wireless market wouldn’t be surprising given that the Commission essentially decided that would be a factor when abolishing the spectrum cap. “Back in the days when Reed Hundt was designing the wireless market, he wanted to divvy it up into pieces. He specifically prevented national footprints,” Baca said. Under FCC Chmn. Powell, one of the attractions of examining the wireless market on a national basis is the extent to which it could bolster wireless broadband deployment, he said. “To get that, you need strong national players with a national footprint. Going to 4, maybe even 3, carriers is not something that they would necessarily object to out of hand,” Baca said.

“A possible merger between AWE [AT&T Wireless] and Cingular will require the Commission to examine the application from a national market basis rather than a local market basis, which is what the Commission has examined in previous wireless merger applications,” Medley Global Advisors said in a note to investors. The firm said the FCC also would need to define the specific product and geographic markets the combined company would serve. “Defining the merged product is considered easier than defining the geographic market where consumers face the same choices,” it said.

Medley Global said: “Factors that could complicate, if not significantly delay, final approval include an opaque merger review process at the FCC, questions surrounding the appropriate use and ownership of spectrum in overlapping markets, possible divestiture requirements from wireline parents to withstand antitrust scrutiny and consumer protection concerns raised by state regulators about service and reliability.” It said FCC review of a possible match-up of Cingular and AT&T Wireless would “set a precedent for how future wireless mergers will be considered.” It said that in comments on the merger, state PUCs could urge provisions that would require carriers to make improvements in areas such as service quality and customer service.

With the demise of the FCC’s spectrum cap, the only significant hurdle faced by a wireless merger would be antitrust review at DoJ, Legg Mason said in a research note. The firm said that while the FCC would have to analyze public interest aspects of a merger, it wouldn’t expect the agency to undertake a higher level of scrutiny than DoJ. A big question is whether Justice would require divestitures in certain markets should an AT&T Wireless-Cingular deal be completed, Legg Mason said. It said the market had become more competitive as the historical edge of the original 2 cellular licensees in each market had eroded. It said that with the advent of wireless local number portability (LNP), “the DoJ might take the view that the historical barriers to customers switching to an alternative carrier has lessened to the point where divestitures are not necessary to protect consumers.”

Several industry observers said the first wireless deal facing regulatory review was likely to see a somewhat easier approval process than the ones that come afterward and result in further consolidation. “The FCC has never tilted its hand and said what is enough competition. We know 2 [carriers] is not enough,” an industry source said. “That does raise the question would 3 be enough? Or 4?” The source said the first merger review process would be watched closely: “People will be looking for signals on this one.”

Another industry source said that although there had been a trend toward national pricing, with less local variation, Justice might not be ready yet to look at wireless markets on a national basis. “I'm not sure we're completely there,” the source said. “If you have a lot of concentration in a particular local market, it might matter less because the surrounding areas are setting some discipline and efficiency.” Another factor that may be important is the extent to which wireless merger partners could argue their union would boost the rollout of wireless data services, an area in which the U.S. has fallen behind other countries. “If that’s a thing that could be improved, that would be an asset,” the source said.

AT&T Wireless said it had hired Merrill Lynch and Wachtell, Lipton, Rosen & Katz as advisers to the board in evaluating the offers. It said it had postponed its annual analyst meeting, which had been set for Tues. in N.Y.

“We don’t have a timeline for this,” AT&T Wireless Chmn. John Zeglis told analysts in a conference call on the company’s 4th-quarter and 2003 results. “It’s not going to be rushed.” He said the company had “multiple approaches from multiple sources.”

The company reported a net loss of $84 million in the quarter ended Dec. 31 of $84 million, reduced from $131 million a year ago. It said its 4th-quarter operating income before depreciation and amortization dropped 2.6% in the year to $890 million, attributing the decline to support of LNP and a new brand ad campaign as well as “higher than expected costs” related to LNP. It said customer turnover -- “churn” -- was 3.3% in the quarter, driven by a high number of expirations of contracts signed in the 2002 holiday season, “systems-related impacts on customer care” and LNP. Churn for the year was 2.6%, which AT&T Wireless said matched the level for 2002.

Zeglis acknowledged the carrier had a problem in the first few weeks of wireless LNP involving software provided by its clearinghouse vendor. Wireless LNP took effect Nov. 24 in the top 100 markets. He said the problems were largely history and AT&T Wireless’s porting rates appeared to be on par with the rest of the industry. “Every wireless carrier has had and is still having some challenges with these LNP procedures,” he said. “A significant percentage of customers are still experiencing delays in porting. That’s because the account data we exchange between the sending and the receiving carriers fails to match around 25 or 30 percent of the time.” He said that almost always was a “2-sided” challenge between receiving and sending carriers. The problem is that carriers can’t port unverified numbers, he said, so when customer information is mismatched between carriers, that port automatically falls out of the automatic porting process and goes to a manual procedure that takes weeks to work through.

To the extent a major wireless merger involved a foreign carrier, regulatory reviews would be tough but not insurmountable, analysts said. The Committee on Foreign Investment in the U.S. (CFIUS) vets mergers involving technologies with national security implications and foreign entities. “There will be a more searching review by CFIUS but I think that most of these combinations would pass CFIUS review,” the Precursor Group’s Baca said. Among the rumored suitors for AT&T Wireless is Japan’s NTT DoCoMo, which already owns nearly 16% of the carrier. “A company like an NTT DoCoMo probably wouldn’t find the political fight worth the candle this year,” Baca said, because even its 16% stake caused a political firestorm. Saying opposition is likely from some on Capitol Hill, including ranking Democrat on the Senate Commerce Committee Hollings (S.C.), Baca said DoCoMo probably “would not want to stir up that hornets’ nest.”