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In a move that could trigger wireless industry dealmaking, the Federal Communications Commission is poised to loosen spectrum ownership restrictions. FCC commissioners plan to vote in early November on a proposal to raise the amount of spectrum a wireless company can own from 45 megahertz to 65 megahertz, said Doug Makin, an analyst at Kaufman Brothers in New York. He also said the agency plans to eliminate the spectrum regulations altogether within 18 months. An FCC official would only say that the commission will act on the spectrum issue “some time this fall.” Industry observers say eliminating the limits could set off a wave of M&A activity, notably among the big six wireless carriers: AT&T Wireless Services Inc., Cingular Wireless, Nextel Communications Inc., Sprint PCS Group, Verizon Wireless Inc. and VoiceStream Wireless Corp. “In major markets where there are six big carriers, we may see only five or four [carriers]” once the ceilings are lifted, said Susan Lynner, telecom policy analyst at Prudential Securities Inc. in Washington, D.C. Under Chairman Michael K. Powell, the FCC has taken incremental steps to deregulate the telecommunications industry, setting the stage for consolidation. Powell also plans to eliminate ownership restrictions in the broadcast, cable and newspaper industries. In addition, the FCC has signaled its willingness to approve deals between long-distance telecom giants such as WorldCom Inc. and AT&T Corp. and the Baby Bells. “Powell’s decision to loosen restrictions on regulations would have happened even if the economic downturn in telecom had not occurred, and it is primarily a result of policy factors,” said Michael J. Balhoff, a telecom analyst at Legg Mason Inc. in Baltimore. “The economic problems have just helped push the cutting back of restrictions into high gear.” In the wireless arena, the FCC’s postponement of spectrum auctions has made providers even hungrier to acquire rivals and build market share. For instance, the agency recently postponed an auction for the 700 megahertz spectrum band until June 2002. This spectrum, which is owned by television broadcasters, has been allocated for commercial and public safety wireless licenses. The regulators also have indefinitely postponed to identify spectrum for advanced, or 3G, wireless systems. “No new spectrum means the large wireless companies will be even more interested in acquiring another one of the major wireless firms,” said Blair Levin, telecom policy analyst at Legg Mason. “With the spectrum regulations loosened, the large wireless companies will take that big step to increase their geographic coverage.” Despite these delays, Powell has said he is committed to increasing the amount of spectrum available to wireless companies. “The demand for spectrum is now,” Powell said at an Oct. 23 press conference. “We have an obligation to start taking steps to make spectrum available for companies.” Of the major wireless carriers, Sprint and Verizon could be among the first to join forces in an effort to expand their coverage areas, Balhoff said. The companies are a good match because they both use the same CDMA digital technology, and they also would largely complement each other’s coverage geographically, he said, while adding that the sheer size of the tie-up would likely draw regulatory fire. “If Verizon were to acquire Sprint today, they would have to make a divestiture in every major market in the country,” added Frank Marsala, analyst at Robertson Stephens Inc. “But once the caps are removed, these large companies could consider merging, and that’s why removal of spectrum caps will have a stronger impact on the big players than on the small players.” A Cingular-AT&T Wireless pairing also makes technological sense because both are moving to adopt GSM digital technology. According to Levin, however, such a deal also would arouse concern among regulators. Such a deal would bring together 37.5 million wireless subscribers and be valued at $40 billion and $45 billion, said Drake Johnstone, analyst at Davenport & Co. in Richmond, Va. Patrick Comack, analyst at Guzman & Co. of Miami, thinks wireless mergers will commence once the caps are removed even if telecom valuations fail to rise. He expects the bidding to start with Nextel. “Nextel is highly leveraged with debt, but they have a business customer base that nobody else has, which will make them an interesting acquisition target,” Comack said. But according to Johnstone, Nextel’s $16 billion debt load, combined with its “isolated” technology, will deter some bidders. Nextel is the only one of the major wireless provider to use IDEN, a digital technology. “A buyer of Nextel would have to spend an additional $3 billion or $4 billion to upgrade its system so it would be compatible with theirs,” he said. Deutsche Telekom AG, which owns VoiceStream, is unlikely to make any major acquisitions in the near future because of its low stock price, Levin said. But other international combinations are possible. According to Levin, meanwhile, Japan’s NTT DoCoMo Inc., which owns 16 percent of AT&T Wireless, is interested in taking control of the company to increase its coverage area. Copyright (c)2001 TDD, LLC. All rights reserved.

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