MCI WorldCom Eyes Nextel
Just months after shying away from a bid for cellular operator AirTouch Communications, MCI WorldCom is now reportedly making eyes at Nextel Communications.
The two companies have held preliminary talks, but various obstacles including price could prevent a union, The Wall Street Journal reported Tuesday. Nextel, based in McLean, Va., has a current stock value of $11 billion.
The news could boost shares of Nextel (NXTL), which climbed 1 to 39 5/8 Monday.
MCI WorldCom, which doesn't offer wireless, is feeling some pressure to acquire such a business amid soaring demand for cellular service in the United States and abroad. Rivals such as AT&T (T) and Sprint PCS (PCS) have been signing up hundreds of thousands of customers in the past year, offering single-rate plans at increasingly lower prices.
Nextel, the only remaining independent national wireless operator, would immediately give MCI WorldCom a major presence with its nearly 3 million subscribers and coverage of nearly three-quarters of the United States.
"Nextel has been the surprise success story (in wireless) over the past two years," said David Cooperstein, a wireless analyst at Forrester Research in Cambridge, Mass. "Along with AT&T, they understand the market the best."
Indeed, rumors have abounded for months about a possible deal between the two companies, and the stock has risen again in recent days. Sprint PCS has also been mentioned as a potential target.
Like MCI WorldCom, Nextel's focus is also geared toward more lucrative business customers. Its wireless users pay almost double the monthly rate ($70) as the average industry user ($40). One reason: Nextel offers a unique "walkie-talkie"type feature that allows dozens of workers to communicate instantly by simply pushing a button.
Still, Nextel carries a huge debt load of nearly $7.7 billion and needs wads of cash to further expand its network. It isn't likely to make money for years, having lost $1.8 billion, or $6.46 a share, last year on revenue of $1.9 billion.
Those factors, along with some tricky accounting questions, could sink a deal. Insiders peg odds of a deal at no more than 50 percent, the Journal reported.
Historically, MCI WorldCom chairman Bernie Ebbers has been opposed to doing deals that dilute earnings. That's one reason he decided not to enter the bidding war last December for AirTouch. After news of MCI WorldCom's interest leaked out, its stock took a beating.
AirTouch eventually agreed to be sold to Vodafone Plc (VOD) of Britain for $60 billion, which beat out an initial $45 billion bid from Bell Atlantic (BEL). Bell Atlantic is making other deals, however, to build a national network, as carriers race to become all-in-one telecom providers in the hope that customers would prefer to get all their service from one company.
Against such an industry backdrop, Ebbers' reluctance against a dilutive deal has apparently eroded. Still, how MCI Worldom stock fares Tuesday could have some influence on how hard Ebbers pursues a Nextel acquisition. MCI WorldCom (WCOM) jumped 3 1/4 to 92 1/2.
Any agreement, meanwhile, would need the backing of cellular pioneer Craig McCaw, whose family holds about a 20 percent stake.
Written By Jeffry Bartash, CBS MarketWatch