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WASHINGTON (CBS.MW) -- Sprint and Nextel Communications are reportedly close to a $35 billion mega-merger that would unite the No.3 and No. 5 U.S. wireless carriers, enabling the combined company to better compete with larger rivals Verizon and Cingular Wireless.
Under the deal, Sprint would issue 1.3 shares for each share of Nextel, according to The Wall Street Journal, which cited "a person familiar with the matter." Some cash would also be involved and Sprint would spin off its local-phone business, the Journal reported.
The terms would value the merger at more than $35 billion and create a company with around $30 billion in annual wireless revenue. Sprint Chief Executive Gary Foresee would reportedly lead the company. Nextel boss Timothy Donahue would become executive chairman.
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In recent days, talks between the two companies apparently have heated up. Both companies have declined to comment.
On Friday, shares of Sprint fell 14 cents to $24.14. Nextel dropped 5 cents at $29.76. Both stocks rose sharply the day before, when reports of renewed talks first surfaced in the Journal.
Sprint has a large consumer base and Nextel is the premier supplier of wireless service to mobile workers, with the highest monthly revenue per user in the industry. Yet Nextel has to spend several billion dollars to upgrade its technology and move to a new spot on the wireless spectrum.
By joining forces, the two companies would save billions in expenses and obtain enough wireless spectrum to offer a variety of advanced wireless services. Legg Mason suggests the combination could reap nearly $8 billion in total savings.
"It makes a ton of sense," said longtime regulatory analyst Scott Cleland, chief executive of Washington-based Precursor Group. "Nextel needs spectrum, scale and a better migration path to broadband."
Together, a Sprint-Nextel combination would serve 39 million wireless customers. That would put the pair behind Cingular, with 47 million subscribers, and Verizon Wireless, which has more than 40 million.
Cingular is owned by BellSouth and SBC Communications . Verizon is jointly operated by Verizon and U.K.-based Vodafone .
"It's like a Darwinian environment, but instead of the survival of the fittest, it's the survival of the biggest," said business consultant Larraine Segil of Vantage Partners.
Antitrust experts said a Nextel-Sprint deal would easily pass muster with federal regulators, who recently approved the even bigger $41 billion acquisition of AT&T; Wireless by Cingular.
"I don't see any serious obstacles," said Paul Glenchur of the Stanford Washington Research Group, which tracks regulatory matters. Concurred Cleland: "The merger wouldn't have any trouble getting approved."
The biggest hurdles are likely to involve very different corporate cultures and incompatible technologies, though they are by no means insurmountable, analysts say.
Nextel is an industry maverick that cobbled together frequencies used by radio-dispatch services to create nationwide presence. It offers unique features, such as a walkie-talkie-like service, that many of its business-oriented customers prize.
The company is able to offer its "push-to-talk" service owing to a unique wireless transmission standard that it uses called Iden. While Sprint (and Verizon) are offering a similar service, it's not as good as Nextel's version.
As a result, some analysts wonder if Nextel could make its push-to-talk service work as well if it has to switch to Sprint's wireless transmission standard, known as CDMA.
Blair Levin, a former top-ranking official at the Federal Communications Commission, thinks the two companies could work out a solution.
He notes that Nextel is set to swap its old radio-dispatch frequencies for new airwaves closer to where Sprint sits on the spectrum. That would make it easier to move customers to the CDMA standard, though they would need new phones.
"Nextel has kept a lot of options open," said Levin, now a regulatory analyst for the brokerage Legg Mason. "They do have the ability to move over to the technology Sprint is using."
If Sprint and Nextel manage a smooth transition, the company could even find itself in a sweet spot between the Bells and the cable companies as those industry titans battle for control of the homes of millions of Americans.
The Bells plan to connect large swaths of their territory by fiber-optic links and offer television service in an effort to combat the move by cable to get into the phone business.
A Sprint-Nextel entity could end up as the wholesaler of choice for cable operators if they seek to add wireless to their "bundle" of other services -- TV, high-speed Internet, phone calling.
"The cable companies are going to need to complete the bundle," said Ben Silverman, an editor at FindProfit.com, who follows the high-tech scene. "The Time Warners and Comcasts aren't going to go to Verizon and SBC."
Sprint can already help the cable companies with wireless service, but by acquiring Nextel, it would gain more leverage. The only other option for cable would be T-Mobile, but its network and marketing muscle would pale in comparison to Sprint-Nextel.
Sprint also has a wireline long-distance network that can carry wireless traffic at a lower cost than if the carrier had to buy wholesale access from other companies such as AT&T.; The company would probably retain that network, analysts said.
Strategic and other issues aside, what remains unclear is how a Sprint-Nextel merger would affect consumers and shareholders.
Already, Verizon is trying to take advantage of integration efforts under way at Cingular, and it would probably do the same and try to woo customers away from Sprint and Nextel. That could force everyone to improve customer service, analysts say.
Alternatively, Cingular and Sprint could get bogged down in absorbing their acquisitions and customer service could suffer.
As for stockholders, Segil of Vantage Partners points out that most major mergers fail to benefit the owners of the acquiring company within a few years of a deal because of all the difficulties involved.
"They really need each other, but the integration process is going to be tough," she said.
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