AT&T Calls Verizon Out

Wall Street expects a counterstroke in the telecom sector.
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For the second time in a year, the voracious appetite of

AT&T

(T) - Get Report

has put telco rival

Verizon

(VZ) - Get Report

on the hotseat.

AT&T's $67 billion agreement to buy

BellSouth

(BLS)

led to a rally in some smaller telecom players Monday, as Wall Street speculated that the combination would once more force Verizon to play catch-up on the acquisition trail. Purported targets

Qwest

(Q)

and

Alltel

(AT) - Get Report

each rose 4%.

BellSouth rose 11%, while AT&T dropped 2% and Verizon slipped 1%, as investors chewed over the terms and the prospect of regulatory scrutiny. The all-stock deal's price tag was "steeper than we would have anticipated," Banc of America analysts said Monday. The companies said in a Monday morning conference call that they don't anticipate any problems on the regulatory front.

The BellSouth deal gives AT&T full control of the nation's biggest cellphone service provider, Cingular Wireless. The companies aim to close the merger early next year. The agreement comes just four months after AT&T's creation in a $16 billion merger of San Antonio's SBC and New Jersey's AT&T. That merger, unveiled last Jan. 31, bolstered AT&T's business-services side and came just two weeks before Verizon rolled out a me-too merger with MCI.

On the call, AT&T execs said they wanted to take advantage of what they called the convergence of wireless and wireline networks, as well as other trends in the communications business. Looking at the rising profile of businesses like Internet phone and Internet video, "We decided the sooner the better," AT&T chief Ed Whitacre said. He said the deal will "accelerate the industry's technological evolution."

The move comes as both AT&T and Verizon, as well as

Sprint

(S) - Get Report

, are trying to move away from the shrinking wireline phone business and increase their exposure to the steadily growing wireless industry. But the big telcos increasingly find themselves competing with deep-pocketed cable operators like

Comcast

(CMCSA) - Get Report

and

Time Warner

(TWX)

to offer consumers the so-called triple threat of telephone, television and Internet service. As a result, all the competitors are spending more time pushing their so-called bundles -- that is to say, two or more services sold to a given household -- to consumers.

AT&T and BellSouth execs on a call Monday morning emphasized the cost-cutting opportunities. They expect to cut 10,000 jobs over three years, on top of 26,000 cuts AT&T had already announced for that period.

Execs also stressed that the combined group will use the AT&T brand, cutting down on confusion and what they called "brand overhang." That presumably means the return of AT&T Wireless, the onetime industry leader whose technical and customer service shortfalls pushed it into Cingular's arms two years ago.

Analysts at Wachovia said the tie-up stands to do the greatest damage to New York-based Verizon, which in addition to its big wirelines business also owns 55% of the fastest-growing U.S. wireless carrier, Verizon Wireless. The state of Verizon's relationship with U.K. partner

Vodafone

(VOD) - Get Report

has been the subject of much speculation in recent years. Analysts say Verizon would like to own the wireless arm outright, but prospects of a buyout of Vodafone's stake remain murky.

"This could most hurt Verizon Wireless over the long term," said Wachovia, which upgraded AT&T to outperform and reiterated an outperform on BellSouth. "VZ may also respond by acquiring other wireless and wireline assets, but it remains challenged by Vodafone."

Like AT&T, Verizon has been focusing on increasing the share of its business it gets from wireless, a point that analysts at Banc of America wasted no time in making.

"Qwest's local and LD businesses would fit well with VZ, but we see VZ's strategic ambitions perhaps more focused on wireless than incremental wireline," Banc of America said. The analysts surmised that this thinking makes "Alltel a potential focal point."

Verizon and Qwest also engaged in a bidding war for MCI last spring, which was accompanied by some

nasty verbal sparring.

On Monday, Alltel rose $2.67 to $66.99 and Qwest rose 39 cents to $6.98, setting a 52-week high.