After Sprint Corp. and Nextel Communications entered a USD35 billion merger of equals deal Wednesday, five-year credit default swaps on Nextel tightened to about 50 basis points Wednesday from 65-70bps the week before. This move is even more significant because Nextel was trading at 150-160bps two and a half months ago. Sprint Nextel will become the third largest U.S. wireless carrier, making it a real competitor to Verizon Wireless and Cingular Wireless.
The credit spread had been tightening in anticipation of the merger, which investors saw coming, particularly after the consolidation of Cingular Wireless and AT&T Wireless, a trader said. "The industry knew that the [Federal Communications Commission] would allow one more merger and no more," he said, citing FCC concerns over healthy competition as the reason.
Standard and Poor's rates Nextel BB plus and placed it on positive watch on Oct. 27. It rates Sprint BBB minus, also with positive watch. The agency does not intend to change its ratings in light of the new deals, but does expect to rate Sprint Nextel BBB minus or BBB. Which way that rating moves will depend on how much debt spins off into Sprint's local exchange carrier business, how smoothly the integration goes and the cost of merging the firms, said Eric Geil, a New York-based S&P analyst.
Moody's Investors Service also viewed the deal as positive and expects the merged companies to be a more effective competitor to Verizon and Cingular. It placed Nextel on review for possible upgrade and changed the outlook of Sprint to developing from positive.
