Sprint poised to take over Nextel in $35bn deal

But must talk to the taxman first...

Sprint is set to buy Nextel for over $35bn in an almost all-stock deal after the companies talk to the taxman today.

The point of discussion will be whether or not the deal will be tax-free to their shareholders. If it is, the number three and number five mobile operators in the US will combine to make a much stronger challenger to the top two, Cingular and Verizon.

The two mobile operators have been in on-again, off-again talks for at least a year and still face the problems that caused the engagement to be called off before. They use conflicting technologies, with Sprint based on CDMA and Nextel on Motorola-based iDEN, a system that has long incorporated push-to-talk and been very popular with customers.

But both need cash to expand into data services. They also need more bandwidth, which the merger would bring. And they hope that their new size will help them to fight off the aggressive top two. They hope that merging operations will save up to $2bn a year.

Jan Dawson, Ovum research director, said in a research note: "The combined entity would not only be closer in size to the big two - it would also be considerably stronger in the business market."

The companies are calling the takeover a merger but it will leave Sprint with slightly over 50 per cent control. It is not yet clear if Sprint will shed its landline business. The deal will also likely mean that the combined company will settle on CDMA for its technology.

This will be a blow to Motorola, which currently earns $3bn a year from iDEN technology. However, Nextel customers are very fond of their push-to-talk phones and the combined operation will probably have to run both systems in parallel for some time.

But Sprint has some leeway – its customers spend an average of $63 a month on their mobiles, while Verizon's spend only $51.60.

The takeover is opposed by consumer rights organisations but Dawson reckons "four aggressive players each looking to snap up each other's customers and win share from the remaining growth in the market should be enough to guarantee continued benefits for end users".