SBC, BellSouth Shares Climb on Reported Cell-Phone Merger Talks

As the use of cellular phones continues to grow, wireless operators are racing to become the dominant players in the industry.

The latest move is expected to come from SBC Communications(SBC) and BellSouth(BLS), which are reportedly in talks to combine their cell phone operations to create a nearly seamless U.S wireless network.

Any such deal between San Antonio-based SBC and Atlanta-based BellSouth would reflect a trend among wireless companies to form alliances to compete nationally and globally.

The possible transaction also would put the two companies at the forefront of those seeking the biggest piece of the emerging market of wireless Internet and email.

SBC's stock jumped 3 15/16, or 10.4%, to close at 41 11/16 Wednesday. BellSouth's stock gained 2 7/16, or 6%, to close at 43.

The companies did not return calls for comment on the possible discussions, which were first reported Wednesday in The Wall Street Journal.

Such a merger would bring together SBC's 11.2 million wireless customers, in regions that include California, the Midwest and the Southwest, and BellSouth's 5.3 million wireless subscribers, primarily in the Southeast.

Still, that would still leave them as a distant second to the wireless alliance between Vodafone Airtouch(VOD) and Bell Atlantic(BEL), which has more than 23 million domestic subscribers.

AT&T (T), with about 12 million U.S. subscribers, and SBC are the next two largest wireless players but each still has less than half the subscribers of Vodafone.

SBC has shown impatience at being a smaller operator, swallowing Cellular One, Ameritech, Pacific Bell and others.

"The No. 1 driving force is cost efficiencies," said Eddie Hold, principal analyst for wireless services for Current Analysis, an industry research firm. "So you see large players picking up small players to fill out their networks and reduce roaming fees for their customers."

A deal between SBC and Bell South still would leave a big hole in the New York market, now dominated by Bell Atlantic Mobile and Omnipoint. "Either of those would be a nice acquisition for SBC," Hold said.

Bob Wilkes, an analyst at Brown Brothers Harriman, doesn't believe those companies, though, would be near-term targets for SBC. "Omnipoint's merger with VoiceStream makes it less desirable for SBC," he said. Bidding for wireless licenses for areas around New York, said Wilkes, would be more reasonable.

If SBC does form a partnership with BellSouth, Hold speculates AT&T would move next, piecing together small markets to fill out its own. As rapid consolidation continues, there will be just five left standing by the end of the year, according to Hold.

Wilkes seconds that notion. "SBC and BellSouth still haven't reached the status of a national provider," Wilkes said. "But we are quickly moving toward a handful of nationwide providers."

Wilkes declined to rate the companies' stocks because, he said, the fast-paced wireless market quickly makes current evaluations obsolete. His firm has not underwritten any offering for any telecommunications company.

The wireless business has drawn interest from America Online(AOL) as well. Last month, it signed deals with six wireless companies. "There's no question that we're on the eve of an explosion in consumers' move to wireless and how they use interactive devices," Stephen Case, the chief executive of AOL, said at the time.

The merger momentum may be larger than it appears.

Analysts said the first catalyst for the current consolidation was the $115 billion merger of MCI WorldCom(WCOM) and Sprint(FON). Indeed, Bell South had tried to take over Sprint last year, but lost out when WorldCom made a higher offer.

Meanwhile, U.S. companies have become unnerved by the aggressive moves of Vodafone Airtouch of Britain. Not only did Vodafone form the joint venture with Bell Atlantic last year, it also is poised to dominate Europe when it completes its $170 billion takeover of Mannesman of Germany.