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If Sprint Corp. does hook up with Nextel Communications Inc. — or, as some observers suggest, Verizon Wireless — the merger partners will face a multibillion dollar-strategic dilemma. The combined entity will have to figure out what to do with Sprint’s wireline assets. The issue looms large, since those assets include a local phone business that could raise $19 billion or so in a spin-off, according to some estimates. While Nextel is a pure mobile carrier and Verizon Wireless is a mobile partnership, Sprint is a more complex animal. The Overland Park, Kan.-based company has significant local and long distance networks, which would carry varying strategic value. A deal between Sprint and Nextel would likely require only modest pruning of markets. “I don’t think you would have substantial issues with a Sprint-Nextel deal,” said Dana Frix, telecom partner at Chadbourne & Parke in Washington. A combination involving Verizon Wireless could be stickier because Verizon is the leading U.S. carrier. Regulatory issues aside, however, financial considerations could drive a spin-off of some Sprint operations. A note from UBS Investment Research on Friday observed that a “transforming transaction” such as a merger with Nextel would provide an opportunity to “unlease the value” of the local assets. “We believe Sprint’s local business is undervalued compared to current market valuations of the [rural local exchange carriers],” the report observed. Incumbent rural phone carriers are prized operations because they have steady cash flow, face limited competition and receive subsidies from the government to ensure phone services in remote areas with higher costs. UBS notes that other rurals are valued at 6 times to 7.8 times estimated 2005 Ebitda. Were Sprint’s 7.6 million local lines spun off in a vehicle with an attractive dividend, UBS estimates that the operations could be worth $19 billion, or about $2,500 for each line. The per-line valuation would put it roughly between the Bells and pure-rural operators. Were Verizon Wireless to acquire Sprint, a local phone divestiture would be likely, judging by the actions of the majority partner. In May, New York-based Verizon Communications Inc. sold its business in Hawaii, which included rural operations, to Carlyle Group for $1.65 billion. Verizon also shopped lines in upstate New York, and has said that it could spin off some of its lines into a separate entity. As for Sprint’s long distance assets, a deal with Nextel or another operator would make the assets more desirable. “If anything, adding Nextel to Sprint would increase the value of the Sprint long haul network,” said telecom lawyer Andrew Lipman of Swidler Berlin Shereff Friedman. “Wireless is only wireless up to a certain point,” he explained, and the additional long distance traffic could be loaded onto Sprint’s network. The market for long distance operations is weaker than that for incumbent rural networks, as well. “Long distance assets are not scarce,” wrote Bear, Stearns & Co. analyst Phil Cusick in a Friday note, “and Sprint remains the third alternative in the large enterprise market competing with AT&T [Corp.] and MCI [Inc.], which are more attractive acquisition candidates, in our view.” Though a regulatory review of a Sprint-Nextel deal would not likely require major surgery, it could take some time. Such a merger would give the new company roughly 21 percent of the total wireless market, according to Roger Entner of the Boston-based consultancy The Yankee Group. By comparison, Entner said, Cingular controls 27 percent following the acquisition of AT&T Wireless Services Inc. and Verizon Wireless has a roughly 24 percent position. Because of its market share, Verizon Wireless would presumably face a tougher merger review than Nextel or Sprint. Regulators rushed to complete the Cingular Wireless-AT&T Wireless deal before the Nov. 2 elections because officials were worried a change in administration would complicate a regulatory decision. With the next presidential election four years away, Entner said, regulators would face less political pressure to complete their review. Vodafone Group plc of Britain, Verizon’s minority partner in the wireless venture, seems unlikely to break out of the venture to launch a solo bid at the moment. The company showed interest in AT&T Wireless Services Inc. during the company’s auction in January and February, which would have required it to exit the Verizon Wireless partnership. Part of the carrier’s motivation for bidding for AT&T Wireless, however, was to acquire a network using technology compatible with Vodafone’s overseas operations. Neither Sprint nor Nextel would provide it with a sympathetic platform. Vodafone declined to comment on any potential interest in Sprint or Nextel, though a source familiar with the situation said the company is not interested. Copyright �2004 TDD, LLC. All rights reserved.

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