Scott Moritz

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Merger Talk Rings Hollow for Big Telcos

Scott Moritz

As AT&T(T Quote) and BellSouth(BLS Quote) continue their protracted courtship, word abounds of new discussions among other players. Some are busily lining up would-be blockbuster matches, while others are chalking up contingency plans and considering consolation prizes.

In the wake of Monday's acquisitions free-for-all in the banking and health care sectors, the prospect of a wave of telecom consolidation must sound good to investors. After all, the growth-challenged old-line telcos haven't exactly been the market's sweethearts in recent years. There's only one hitch: Someone's got to move first, and as yet, actual action has been in drastically short supply.

"Basically, if BellSouth and AT&T merged, it would provide a great impetus for the others to do something, since it would instantly make BellSouth a major player," says Sam Greenholtz, an analyst with Telecom Pragmatics.

"Then SBC(SBC Quote) would be forced to do something like jump on MCI, while Verizon(VZ Quote) continues on its own with some asset purchases," Greenholtz continues. "But something has to set this in motion."

Sniffing

A prime example of the urge to merge is at local phone giant SBC Communications, which is said to be exploring a linkup with failed long-distance and business-services provider MCI. Those talks come in response to the oft-rumored prospect of BellSouth's acquisition of the No. 1 player in those markets, according to several industry sources.

Meanwhile, though debt-burdened Verizon says it's sticking with its go-it-alone strategy, that hasn't stopped the nation's largest phone company from sniffing around the broken business bins for cheap assets from outfits such as WilTel (WTEL Quote) and 360 Networks. And just last month, No. 4 long-distance company Sprint (FON Quote) opened its own tentative talks with BellSouth.

MCI and Verizon declined to comment. SBC was unavailable.

Yet despite the newly charged, or in some cases recharged, negotiations, nothing by way of a major merger has materialized in more than two years. And few industry experts see anything developing immediately from the current round of talks.

"There's no doubt that there has to be consolidation, and it will eventually happen, but not in the near term," says Mike Smith, an analyst with Stratecast Partners, a consultancy for most of the large telecom companies.

There are several obstacles such as antitrust concerns, the need to make competitive divestitures, and the potential for shareholder dilution, says Smith. But most important, there's valuation.

Given the strength of their balance sheets, BellSouth and SBC are in the best positions to drive the deals, says Smith. But potential partners AT&T, MCI and Sprint make for tough targets, thanks to their relentless revenue erosion and uncertainties in the market.

Sliding

Last week's earnings reports gave a fresh update to the familiar sales deterioration story that AT&T and its ilk have been enduring. Chief among the reasons BellSouth would want AT&T is the lucrative business services operation. But AT&T shocked investors by posting a 6% decline in business revenue from the year-ago period. For its part, BellSouth posted solid numbers and seems to have opportunities, albeit modest and well within its regional borders.

"It would certainly answer their executive ascension questions and fix their growth problem, but I just don't see BellSouth hooking up with AT&T anytime soon," says Marty Hyman, an independent telecom consultant who has provided strategy and analysis to several of the big phone companies.

And while the other players maneuver, the largest is somewhat hobbled. Verizon, with more than $50 billion in debt, has less financial flexibility and is probably wise to shop for cheap network routes and other assets outside its territory, say analysts.

But in order for the acquisition race to start one big merger will be necessary to trigger a chain reaction, say analysts.

Until then, there's little to talk about but the talks.