PHILADELPHIA/NEW YORK (Reuters) - Sprint Corp. is close to an agreement to buy Nextel Communications Inc. for about $35 billion in a mostly stock deal that would combine the No. 3 and No. 5 U.S. wireless telephone companies, sources familiar with the situation said on Friday.
A Sprint-Nextel merger would face some expensive technology hurdles as their networks use incompatible wireless systems, analysts said. Still, the companies would benefit by gaining more wireless spectrum to transmit calls and a more diverse customer base.
Nextel caters to high-paying corporate customers with its walkie-talkie-type telephones, while Sprint targets mass-market customers such as families and teenagers.
"We believe that a potential combination of Sprint and Nextel would make sense on a number of measures, including spectrum position, network technology upgrade path and the complementary nature of the two customer bases," said Merrill Lynch analyst James Moynihan.
The companies, which have held talks over the past year, renewed negotiations in recent days for a merger that would create a wireless giant with about 39 million customers to rival industry leaders Cingular Wireless and Verizon Wireless.
The companies aim to forge an agreement by the middle of next week, although negotiations could still break down, sources said.
Sprint Chairman and Chief Executive Gary Forsee would be chief executive of the combined company, while Nextel Chief Executive Tim Donahue would be executive chairman.
The board of directors would be evenly split between the two companies, the sources said.
Under the terms being considered, Sprint (NYSE:FON - news) aims to pay 1.3 shares of Sprint stock for each share of Nextel (Nasdaq:NXTL - news), the sources said.
Based on current stock prices, that would value Nextel at about $35 billion, or $31.38 a share. That price includes a small component that gives Sprint slightly larger ownership in the company for tax purposes, sources said.
As part of a deal, Sprint would spin off its 18-state local telephone business through a tax-free dividend to shareholders, sources said. The local business would operate as a new publicly traded company.
Sprint's long-distance telephone and data services would remain part of the company and merge with Nextel, sources said. That would allow the companies to sell packages of long-distance, wireless and Internet services to customers.
The combined company may keep both the Nextel and Sprint brand names, the sources said.
MERGER TO RAISE PRICES?
A merger would continue the long-awaited consolidation in the fiercely competitive U.S. wireless industry.
Market leader Cingular Wireless, a joint venture of SBC Communications Inc. (NYSE:SBC - news) and BellSouth Corp. (NYSE:BLS - news), kicked off the year with a bidding war for AT&T Wireless Services Inc., which it bought for $41 billion.
But there are still five large national mobile phone companies -- Deutsche Telekom AG's (DTEGn.DE) T-Mobile USA is No. 4 -- as well as several regional players.
"We believe consolidation in wireless may ultimately increase levels of competition in the sector, which is good for consumers, regulators and providing scale to a third competitor," said Michael Bowen, an analyst with Friedman, Billings, Ramsey & Co.
But consumer activists say shrinking the number of national wireless service companies can only hurt consumers.
"We've seen in recent years that consumers are getting better and better deals," said Susanna Montezemolo, a policy analyst for Consumers Union, a nonprofit consumer advocacy group.
If regulators approve a Sprint-Nextel merger, "those great deals that consumers have come to expect and the ever-better packages will be a thing of the past," Montezemolo said.
The New York Times reported that Verizon Wireless, a joint venture of Verizon Communications Inc. (NYSE:VZ - news) and Britain's Vodafone Group Plc (VOD.L), might be interested in making a bid for Sprint.
Yet sources familiar with the situation told Reuters such a possibility was slim.
Verizon Wireless had previously looked at the assets of both Sprint and Nextel and decided not to make an offer for either, they said.
Verizon Wireless declined to comment.
Shares of Nextel closed at $29.76, down 5 cents, on Nasdaq. Shares of Sprint, the most actively traded stock on the New York Stock Exchange (news - web sites), shed 14 cents to close at $24.14.
(Additional reporting by Sinead Carew and Dan Wilchins in New York, and Justin Hyde in Washington)