Verizon Hints at Further Spending Cuts

Verizon (VZ Quote) sicked its lawyers on regulators again; but that was far from the worst news for this unhealthy sector.

No, the big New York telco dropped another hint Monday that investors should take far more seriously: The company in effect threatened to turn its cost-cutters loose once more on its already shrunken capital-spending budget. Such a move could wreak havoc on struggling telecom equipment companies such as Lucent (LU Quote) and Nortel (NT Quote).

Speaking to investors at the Merrill Lynch Global Communications Conference, Verizon CEO Ivan Seidenberg said he was both "confused and angry" about the Federal Communications Commission's decision Thursday to hand wholesale pricing jurisdiction to the states.

The local phone giants had hoped the FCC would discontinue rules that forced the Bells to rent parts of their networks to rivals at steep discounts. Though the FCC order was viewed by many as a mixed bag -- and seen as hands-off regarding Internet mandates -- the lack of an immediate resolution to the competitive pricing issue was seen as a disappointment to the Bells.

"We will take it to court to seek a stay and work toward a reversal," Seidenberg told a lunchtime gathering, adding that federal regulators have lost two previous challenges in their attempts to foster local phone competition.

"One word in every paragraph of that ruling is appealable," Seidenberg added.

Investors in Verizon certainly hope so. The company's shares fell 5% Thursday in the wake of the FCC decision as Wall Street pondered the prospect that regulatory relief won't be forthcoming. That would leave a company carrying $52 billion in net debt along with a weakening core phone business plagued by customer defections to wireless services and cable-modem Net access.

Though it is customary for regional Bells to fight nearly every regulatory move, the latest battle pits two enormous forces with significant industrywide implications. Among the more important aspect for Wall Street will be the potential effects on equipment suppliers if the Bells cut spending.