BellSouth May Connect With Wireless as a Catch-Up Play

Some analysts see VoiceStream as a possible acquisition target for the regional carrier as it looks at ways to grow like its Bell brethren.
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In the race to become a super carrier of the future,

BellSouth

(BLS)

is still standing at the starter's gate.

Often described as conservative and solid, regional telco BellSouth controls 37 million local phone lines in its nine-state Southeastern region and serves 4.8 million U.S. wireless customers. BellSouth, traditionally among the top regional Bell performers, has often eschewed talks of mergers.

But those days seem long gone. Last month, BellSouth made an unexpected $72 billion

bid for

Sprint

(FON)

, only to lose to a $115 billion bid from

MCI WorldCom

(WCOM)

. BellSouth Chairman and CEO Duane Ackerman called the Sprint deal a "transformational opportunity," but its failure to snare Sprint has raised questions about its long-term strategy.

However, BellSouth shares are down 15% for the year. BellSouth will report third-quarter earnings Wednesday, and analysts expect good numbers. Dan Reingold, who follows BellSouth for

Merrill Lynch

, expects a 19.7% year-over-year increase in earnings per share for the company -- tops among the Bells. Reingold rates BellSouth an accumulate. (Merrill Lynch has performed underwriting for BellSouth.)

Analysts say the lack of a clear national growth strategy and the prospect of new competition on its home turf from newly merged

SBC

(SBC)

and

Ameritech

have driven the stock down to the bottom of the Bell pack. But BellSouth has to hit the acquisition trail if it harbors ambitions of ever growing up.

To address its national ambition, one solution is a

deal with new-era long-distance carrier

Qwest

(QWST)

and its pending partner

U S West

(USW)

.

However, BellSouth may first focus on another option -- creating a coast-to-coast wireless network, analysts say. Currently, Bellevue, Wash.-based

VoiceStream

(VSTR)

tops the list.

"They may feel a need to make some kind of statement," says

Olde Discount

analyst Dan McBride, who has a neutral rating on BellSouth. "The one obvious candidate is VoiceStream; they fit together like hand and glove." Olde has no banking relationship with BellSouth.

Both VoiceStream and BellSouth use GSM (global systems mobile) and PCS (personal communications services) technology. This means little to consumers, but saves a fortune on new equipment for network integration.

VoiceStream has been busy buying up smaller wireless companies -- Midwestern wireless carrier

Aerial Communications

(AERL)

and Northeastern carrier

Omnipoint

(OMPT)

-- to give it bigger range, or footprint, in wireless lingo.

"Wireless is your fastest way to get to a national presence," says analyst Michael Elling at

SSC Global Advisory

, a Mendham, N.J.-based wireless consulting firm. Just look at how national wireless services such as

AT&T

(T) - Get Report

,

Sprint PCS

(PCS)

and

Nextel

(NXTL)

are leveraging their marketing advantages.

"VoiceStream would be good for BellSouth, because they would have a nice big footprint. Then

BellSouth will probably go for Qwest and U S West and end up as one of the industry behemoths," says Cynthia Motz, a wireless analyst with

Credit Suisse First Boston

who has no rating on VoiceStream. Credit Suisse was adviser to Aerial in its deal with VoiceStream.

However, there is one problem with this scenario, says Motz: "Whomever goes after VoiceStream is going to have to deal with SBC."

SBC controls California, the country's No. 1 wireless market. But SBC, having just closed its merger with Ameritech earlier this month, is not in a position to make another major acquisition anytime soon. Motz says she would expect SBC to be ready for another deal in six months to a year.

Another potential impediment to BellSouth's wireless ambitions is Southeastern wireless company

Powertel

(PTEL)

. VoiceStream has been rumored to be in discussions to acquire Powertel and its 382,309 customers in 12 states, mostly in the Southeast. VoiceStream and Powertel officials declined to comment for this story.

If BellSouth were to acquire Powertel with VoiceStream, it would have to sell off the overlapping Powertel territory. A complication, but not an impossibility, says Motz.

"Right now," says Motz, "the feeding frenzy is on, and it makes everyone a bit nervous because if you want a national footprint, there are not that many wireless companies out there."

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