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Verizon Spies Labor Storms on the Horizon

Investors remember the havoc a strike wrought with the stock the last time around, in 2000.

The thought of another standoff between Verizon (VZ) - Get Verizon Communications Inc. Report and its labor unions has Wall Street wincing.

The nation's largest local phone company and one of its biggest unions have begun talks over agreements set to expire this summer. As usual, management and labor don't exactly see eye to eye, with each side hurling invective about the other's demands.

With two union contracts covering some 80,000 workers hanging in the balance and Verizon facing setbacks on a number of other fronts, investors can be forgiven for squirming a bit about the prospect of further acrimony. After all, Verizon and its regional Bell peers have sat out much of the spring rally that has swept across tech and telecom, as their softening core businesses and heavy debt load continue to discourage would-be buyers. And many on Wall Street remember Verizon's sharp pullback the last time it faced a strike, in the summer of 2000.

Verizon shares rose 18 cents Wednesday to $40.15.

Coming to Terms

Perhaps most alarming for investors watching the situation is how badly Verizon's business has atrophied since the last labor deal was forged. The New York-based company has since seen sharp drops in revenue and total access lines. And as big and powerful as Verizon is, the strike of 2000 dealt the stock a serious blow.

As you may recall, the last time it took an 18-day strike to bring the two parties into agreement, the episode cost the company about $2 million a day, or roughly 1% of its average daily revenue, according to Deutsche Bank analyst Viktor Shvets. But while the company shrugged off the strike's financial effects, the stock wasn't nearly as durable.

Verizon shares fell 12% to a 52-week low three days into the strike. Of course, the bitter labor negotiations merely compounded the company's troubles at the time. On Aug. 8, the company cut financial projections and reached an $800 million agreement to buy half of


, a struggling digital subscriber line, or DSL, outfit. But bears would note that Verizon has its issues now, too.

With that as the backdrop, collective bargaining with the International Brotherhood of Electrical Workers began this week, on the typical rocky terms. Verizon declared it was seeking more health care contributions and fewer absences from its workers. Union representatives said they want pay increases that reflect productivity gains, as well as unfettered access to recruit new members in the company's growing wireless unit.

The current union deals expire Aug. 2. This time around, while industry watchers will be interested to see how much leverage the union has amid a weak economy and uncomfortably high 6% unemployment levels, investors will be keen to see how the market reacts.


Having cut thousands of union and nonunion jobs over the past few years, observers including Shvets say relations between management and the union are strained. Some investors say they expect a lot of noise, even a strike -- but that's par for the course with Verizon and may not amount to a major stock event.

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CIBC analysts Tim Horan and Ed Yang issued a note Wednesday reporting that Verizon is preparing for a strike by "sending letters to retirees for work, and asking management employees to forgo taking vacations this summer."

As Verizon prepares to start preliminary talks next week with its largest union -- the Communications Workers of America -- more rancor and positioning are to be expected.

Most observers note that shares in Baby Bells such as Verizon,









remain well below their 2003 highs.

With larger, long-range issues like increased competition for their core local business and no signs of sales growth in sight, the Bells' acrimonious labor negotiations can almost be taken in stride, say some investors.