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By Margaret Kane, 15 December 2004 15:10

NEWS

Sprint will buy Nextel in a $35bn deal that will create a wireless behemoth.

The deal combines the number three and number five players in the market and will produce a company with about 40 million customers, including affiliates.

Sprint and Nextel shareholders will each own 50 per cent of the combined company, dubbed Sprint Nextel. The terms of the deal call for each Nextel share to be exchanged for cash and stock in the new company worth 1.3 shares of the new firm. The exact blend of cash and stock will be determined at a later date, but based on today's share prices, each Nextel shareholder would receive about 1.28 Sprint Nextel shares and about 50 cents in cash for each Nextel share.

Sprint shareholders will retain their existing stock. The total cash payment will not exceed $2.8bn, according to the companies.

The merger between the two has been rumoured for a while, as they sought a way to fight off rivals including Cingular Wireless and Verizon Wireless. Cingular recently completed its acquisition of AT&T Wireless, making it the largest wireless carrier in the United States.

Sprint chief executive and chairman Gary Forsee will be chief executive of the new company, while Nextel chief executive Timothy Donahue will become chairman. The new company's board will have 12 directors, six from each company. The merger is expected to close in the second half of 2005, subject to regulatory approval.

"This merger positions Sprint Nextel for greater success than either company could have achieved alone," Forsee said in a statement.

The companies said the merger should produce cost savings of about $12bn, driven by lowered capital expenditures, reducing the number of cell sites and switches, and cutting sales, marketing and administrative costs, among others.

Sprint plans to spin off its local telephone business to shareholders of the new company as part of the deal. The local business will be the largest independent local telephone company in the United States, with 7.7 million local access lines in 18 states and revenue of more than $6bn over the past four quarters.

Margaret Kane writes for CNET News.com.