BellSouth's ( BLS) options are narrowing as the telecom-consolidation parade bypasses the Atlanta phone shop. With SBC's ( SBC) announcement Monday to buy AT&T ( T) and Sprint's ( FON) pending hookup with Nextel ( NXTL), industry watchers are eager to hear BellSouth's plan. Having balked at a $24-a-share price tag for AT&T in October 2003, and now losing out to AT&T in a deal with SBC, BellSouth suddenly finds itself without two of its prime merger options. Assuming all big telcos must find partners, investors now see Sprint and MCI ( MCIP) as the two most likely alternatives for BellSouth. But neither move would be a perfect fit for BellSouth, and almost any decision would need to address the Cingular joint venture with SBC. Still, it's hard to ignore the big consolidation trend afoot in phone land. "They are certainly under more pressure than ever to do something," says Telecom Pragmatics analyst Sam Greenholtz. "The SBC and AT&T deal leaves BellSouth the smallest of the group it wants to compete in." Counting debt, the $21 billion proposed deal between SBC and AT&T would allow the No. 2 telco to overtake Verizon ( VZ) in size and leave BellSouth a distant third-place contender. More importantly, SBC's acquisition of AT&T would give the big San Antonio-based Bell the largest position in business services and international voice and data trafficking sales. Not only are BellSouth and Verizon weak on this front, but SBC will use its broader offerings to swipe business from its rivals. Further insulting the jilted, SBC would be using AT&T to open the door with BellSouth's big business customers and then plying them with wireless offers from Cingular to help lure them away. "There was always a slight inefficiency to the arrangement originally, but with AT&T, that becomes a lot more of a problem," says independent telecom consultant Marty Hyman, referring to the prospects of BellSouth competing against its cell-phone service partner SBC.
BellSouth shares dropped 75 cents, or 3%, to $26.16 Monday. But some observers say BellSouth need not be rash. BellSouth could always stick it out alone until SBC came calling again in a year or two, says a Wall Street money manager. One person familiar with discussions inside BellSouth says: "It does not appear that they're in a panic there, but they are definitely concerned by the shift in power. I think they are awaiting the FCC and Justice Department's take on the merger." The SBC and AT&T deal will require approval from some 28 state regulatory boards, the Federal Communications Commission and federal antitrust officials. SBC expects the approval and closing process to take 17 months. There is a $560 million breakup fee should either party back out of the deal. Analysts expect the deal will bring a big round of employee cuts but AT&T and SBC said Monday it was too early to discuss such plans. SBC and AT&T plan a joint analysts conference at 1 p.m. EST Tuesday to share more details of the merger plan.