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Verizon Sniffing Around Sprint

Verizon (VZ), the nation's largest phone company, is now taking a closer look at Sprint (FON), amid a rash of merger dealings across the telecom industry.

People close to the Verizon camp say the big telco has started a so-called due diligence process at Sprint. The sources describe the work as at the "fact finding" and information-gathering stage, with no formal discussions under way.

Like fellow Bells BellSouth (BLS) and Qwest (Q), Verizon has reached a critical turning point for its business strategy, thanks largely to SBC's (SBC) $16 billion bid for AT&T (T) Monday. The proposed merger would thrust SBC into a truly national market, for the first time pitting the San Antonio telco against its regional Bell peers.

A representative for Verizon declined to comment. Sprint's CFO Bob Dellinger said in an interview Thursday that the company was "excited about what we are doing with Nextel," adding, "that's where our focus is." In December, Sprint and Nextel (NXTL) agreed to a $30 billion merger of equals.

Industry observers say it's consolidation time and all the players are exploring their contingency plans and counterstrike options.

"I think in Verizon's case, they are being pushed," says Telecom Pragmatics analyst Sam Greenholtz. "I don't think they are ready yet, but they have to look at players like Sprint -- they don't have any choice."

The timing isn't exactly perfect for Verizon. The phone giant is spending billions on a massive fiber optic network expansion and a similarly ambitious wireless Internet upgrade -- even as it tries to reduce its $36 billion debt. It is saddled with a cumbersome power-sharing arrangement with U.K. telco Vodafone (VOD) in the hard-charging Verizon Wireless joint venture.

Nonetheless, the walls are arguably closing in a bit on the New York telco.

According to a report in The Wall Street Journal Thursday, Denver-based Qwest is discussing a deal with MCI (MCIP), the No. 2 phone and data service provider to big businesses.

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