Urge to merge could hit small cellphone cos

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: Merger mania may be coming to a town near you. With some of the nation’s biggest cellular phone companies having announced mergers in recent months, investors are now turning their attention to the smaller cell phone companies that dot rural and suburban America.

The news that Alltel, the largest of the regional wireless providers, is in negotiations to buy Western Wireless for about $4 billion further fueled speculation that the next round of consolidations will involve smaller carriers.

Shares of Western Wireless surged as much as 19.4% in trading Thursday, before finishing up $4.70 to close at $35.70. Alltel’s shares slipped $2, or 3.4%, to $56. Shares in other smaller carriers, including US Cellular, Rural Cellular and Dobson Communications rose significantly.

News of the impending deal between Alltel and Western Wireless, which was first reported in The New York Times on Thursday, came after several weeks of heavy trading in shares of regional carriers, a sign that investors have been betting that more deals are on the way. The new investor interest makes sense.

Growth in the country’s $100 billion wireless industry has slowed in recent years as the market moves closer to saturation. More than 61% of Americans now have

cell phones, almost twice as many as in 2000. And the customers who have yet to get cell phones are costly to acquire in terms of marketing expenses and, worse, are likely to spend less on cell phone services.

Regional carriers, like the big national providers, are struggling with this problem. But they are also under other pressures. A main source of their revenue — roaming fees from the national carriers — is diminishing as the national companies pressure them to cut prices. At the same time, regional carriers must decide whether to invest what could amount to billions of dollars in third-generation cellular networks to remain compatible with the national carriers.

These forces will probably force smaller carriers like Western Wireless to seek deals. With 1.4 million subscribers, Western Wireless is too small, industry experts say, to weather on its own the forces buffeting the industry.

The regional wireless carriers are “between a rock and a hard place,” said Mitch Mitchell, a consultant at AT Kearney. Western Wireless, he said, could be taking a “cost avoidance” strategy by selling itself rather spending more money to upgrade its networks.