Germany’s Deutsche Telekom is reportedly moving closer towards agreeing a deal to merge its US cellular subsidiary, VoiceStream Wireless, with the second largest US operator, Cingular Wireless. According to the Financial Times, the two companies are close to finalising the details of the merger, including the size of the stakes each will take in the new company. It is thought, however, that one of the main sticking points is that Deutsche Telekom is seeking greater control of the merged entity. The operator is holding out for improved terms which will prevent its stake being diluted should further shares be issued.

Insight

Financial analysts have been expounding the merits of consolidation in the US wireless market for some time. The sheer geography of the country presents a huge challenge for network operators in terms of next generation build-out, especially those choosing the GSM evolution path. To deploy W-CDMA, Cingular and T-Mobile (formerly VoiceStream) will be required to build new network stations across the country. As operators in Western Europe are already discovering, the only way to justify this sort of expenditure is through network sharing. In a market where the regulartory evironment is more persmissive, a merger will provide even greater cost savings.

The US currently has six nationwide operators – two commited to CDMA, three on the GSM evolution path and one using Motorola’s iDEN. It would be crazy for T-Mobile to seek out a merger partner using a different network standard, so that leaves Cingular and AT&T Wireless as its potential partners.

A merger with either of these would create an operator to rival Verizon, the dominant CDMA player supported by Vodafone, and strengthen T-Mobile’s strategic position in the international league. It is already the only GSM operator with a controlling stake in a US counterpart and this could become increasingly valuable as GSM evolution begins to challenge CDMA’s dominance in North America.