Partner Channel: Sprint Affiliate Merger Creates Great Expectations

By Tara Seals

Posted: 11/2001

Partner Channel Headlines

Sprint Affiliate Merger Creates
Great Expectations
By Tara Seals

Two Sprint Corp. wireless PCS affiliates, AirGate PCS Inc. and iPCS Inc., have agreed to create a behemoth of a partner serving 300,000 of Sprint’s wireless customers. The move may signal a consolidation trend and a healthier outlook for the carrier’s partners, which until now have remained small, dependent on Sprint and in debt.

The combined company will be the largest Sprint PCS network partner in terms of coverage. The merger is expected to close in February. Once completed, iPCS will continue operations as a wholly-owned subsidiary of AirGate.

The affiliate will be an anomaly for the carrier, which launched its affiliate program in 1998 with an eye to keeping its partners small and able to tackle areas Sprint itself could not reach.

“Sprint affiliates are typically much smaller than the affiliates of other major carriers, specifically AT&T [Corp.] and Nextel [Communications Inc.],” says The Yankee Group analyst Knox Bricken. “AT&T’s affiliates average 15 million PoPs, whereas Sprint’s average 4 million.”

These wireless partners have very little ownership in their businesses, but assume much of the risk.

Affiliates pay Sprint for the use of its brand name. Also, Sprint affiliates do not own spectrum. They lease it from the carrier under a 20-year commitment with three 10-year renewal options. Sprint handles the back-office functions as well.

PCS partners do, however, build out networks and spend heavily on operational costs, meaning they typically carry large debt.

“We believe this serves to infringe on the ability for the Sprint affiliates to effectively grow their businesses and achieve economies of scale without consolidation,” says Bricken. “Thus, we expect the Sprint affiliates to continue consolidating until they reach a size more in line with the AT&T affiliates and other Tier 2 carriers.”

The structure limits PCS affiliate autonomy, but puts Sprint in position to eventually absorb the affiliates.

“Eventually, incorporation into the parent is the exit strategy for all of the affiliates, including AT&T’s and Nextel’s,” says Bricken. “However, this absorption will not occur for several years because … the larger carriers do not want to incur this high debt.”

In the meantime, Airgate and iPCS are taking a “united we stand” tack that could pay off. AirGate CFO Alan Catherall says, the company will be cash flow-positive in the third calendar quarter 2002, with a significant cash cushion.

The outlook is based on sheer volume. The combined network infrastructure will cover 12 million points of presence in the Southeastern United States and the Midwest, including Atlanta, Charlotte, Chicago, Detroit and St. Louis.

“By leveraging our joint operating expertise and the Sprint brand, we believe there is significant potential for additional subscriber growth and market penetration in our combined territory,” says Tom Dougherty, AirGate president and CEO.

With a territory that covers 62,000 contiguous square miles in the Southeast, public company AirGate PCS is one of the largest Sprint PCS affiliates with a completed PCS network.

iPCS serves a population of about 7.4 million in 37 markets in Illinois, Iowa, Michigan and eastern Nebraska. iPCS is completing its network build-out by the end of the year. Its territory includes the headquarters of large companies such as State Farm Insurance, Archer Daniels Midland, Dow Chemical, John Deere and Caterpillar and about 90 colleges and universities.

The transaction is worth about $803 million in equity, based on AirGate’s Aug. 28 closing stock price, when the deal was struck. The tax-free, stock-for-stock transaction for 13.5 million shares of AirGate common stock includes 1.1 million shares reserved for issuance upon the exercise of outstanding iPCS options and warrants. AirGate also will asume about $97 million of iPCS net debt.