Sprint Nextel Corp. said Wednesday it won’t negotiate a buyout of Nextel Partners Inc., signaling that it doesn’t want to pay the full market value for its rural affiliate. Nextel Partners holds a so-called “put” option that requires Sprint to buy out the company, but Sprint’s decision indicates that the two companies can’t agree on a price. Sprint could be forced to pay $5 billion or more to buy the portion of Nextel Partners it does not already own unless outside mediators determine otherwise. Sprint wants to pay significantly less than that.
Nextel Partners, based in Kirkland, Wash., sells Nextel-branded phone service to 1.8 million customers in rural and mid-tier markets. The company’s stock has surged 40% since Sprint and Nextel announced their merger in December 2004, driven largely by speculation that the company would trigger the put option. Sprint and Nextel consummated their $35 billion merger last Friday.
Clearly, Sprint does not want to pay the full markup. At Nextel Partners’s current stock price, each subscriber would be worth nearly double the amount that Sprint paid for each customer of Nextel Communications, according to calculations by Pat Comack, an independent analyst at .
Under the put option, Sprint Nextel (S) and Nextel Partners (NXTP) can each hire an appraiser to determine the “fair market value” of Nextel Partners. If the two appraisers provide valuations more than 10% apart, a third appraiser would be hired to resolve the matter. Sprint said the process could take at least four months, but analysts think it could take a lot longer unless the two companies reach an accord.
“It’s going to be a very difficult process,” Comack said.
Sprint spokesman Nick Sweers said “certainly we’ve had ongoing discussions with all of our affiliates,” but he declined to characterize the status of talks with Nextel Partners. “We just think the appraisal process is best,” he said. A Nextel Partners spokeswoman declined to comment.
On Tuesday, Sprint CEO Gary Forsee said that the newly merged company has plenty of cash to buy out its smaller partners if they don’t want to continue selling Sprint or Nextel-branded service. Sprint has 10 affiliates.
“Some of them may want to continue to be affiliates of the new Sprint Nextel,” Forsee said in an interview with Dow Jones. “Some may want to stop that relationship, and we would go down the path of acquiring them, which we have done with US Unwired.” Listen to Sprint interview.
In recent trades, shares of Nextel Partners were up 14 cents at $26.25. Sprint rose 74 cents to $26.60.
In June, the board of Kirkland, Wash.-based Nextel Partners said it would recommend to shareholders that they activate the put option and sell out to Sprint Nextel. A few weeks later, Nextel Partners sued Nextel Communications Inc., which was still independent at the time. Nextel Partners argued that it was not given enough input into Nextel’s marketing strategy after the company was acquired by Sprint.
Nextel denied the charges and said it had treated Nextel Partners fairly. The case is still pending, and if Nextel Partners wins, Sprint could be forced to delay the rollout of a new marketing campaign slated to start as early as next month.
Nextel Partners is dependent on the success of the Nextel brand. Yet that brand is likely to be phased out in long run in favor of Sprint. Sprint already owns about one-third of Nextel Partners as a result of its acquisition of Nextel. Shares of Nextel Partners it doesn’t already own are valued roughly at $5 billion. In addition, Sprint-Nextel might have to add a premium based on the “fair market value,” as determined by an independent assessment.
Last year, Nextel Partners posted a 34% gain in sales to $1.37 billion, with net income of $53.7 million.