Williams Communications May Tempt SBC

Wall Street is growing less enamored with bandwidth plays, but some analysts say big telcos are in the mood to buy.
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Investors may figure they don't need

Williams Communications

(WCG) - Get Report

and its big bandwidth business, but some analysts say a major telco might want it.

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The leading scenario is that Tulsa, Okla.-based Williams is building a coast-to-coast network along its gas pipeline rights-of-way that would fit perfectly with

SBC's

(SBC)

entry into the long-distance space. Plus, SBC already is an investor.

"The primary reason to own Williams is that you're betting that SBC will take this company out" once it's no longer barred from long distance, says Tom Friedberg, who follows Williams for

Janco Partners

, a Denver investment firm. (Friedberg has no rating on Williams or SBC, and his firm hasn't performed recent underwriting for either company.)

Williams says it wants to remain independent. SBC declined to comment.

A buyout would salvage what so far has looked like a poor choice for many investors.

Williams originally wanted to go public in the spring, when investors were hot for bandwidth providers. But the

Securities and Exchange Commission

and Williams went back and forth on how the company would account for leased cable that wasn't yet connected to a network.

So by the time Williams hit the public market on Oct. 1, investors were worried that there was too much bandwidth coming on the market, a sharp contrast to their beliefs back in the spring. And they had plenty of bandwidth plays in their portfolios,

Level 3

(LVLT)

,

Qwest

(QWST)

and

Global Crossing

(GBLX)

.

Williams shares hit a high of 33 20/32 on Oct. 12, but have since retreated to their initial price, 29. Its shares were trading at 27 3/4 late Wednesday morning.

So the Williams brass went on a monthlong roadshow of sorts that included 170 meetings with institutional investors, a two-day

Bear Stearns

conference and a dinner with bankers at the "21" Club two weeks ago. Last week, CEO Howard Janzen was in New York for a round of one-on-one interviews with the financial press before capping off the week with a blowout party in Las Vegas with bankers.

The challenge for Williams is creating an identity in a marketplace of strong identities. The three big names in bandwidth already dominate their respective categories. Level 3 is synonymous with vast transcontinental capacity. Global Crossing is known for its low-cost undersea routes. And Qwest, also with capacity, has been moving toward a network services and management strategy.

Williams, with its 125-city, 33,000-mile fiber-optic network, is lost in the pack, somewhere between a pure wholesaler of communications capacity and an outsourcing service for application hosting and network management.

"Think about it," says one analyst who asked to remain anonymous. "If you are the corporate purchasing manager looking for a big pipe, are you going to pick the in-betweener?"

CEO Janzen says, "All the deals aren't done yet." He's working on selling contracts to a list of 30 emerging players, including an imminent deal with

Comdisco

(CDO)

, a network management and data recovery business. (Comdisco confirmed the discussions.)

Andrew Hamerling, an analyst with

Banc of America Securities

, likes Williams' carrier strategy. Hamerling points to the deals struck with two high-speed communications access providers,

Winstar Communications

(WCII)

and

Rhythms NetConnections

(RTHM)

, to illustrate how he expects more traffic will be driven onto Williams' network. Hamerling has a buy rating and a price target of 37 on Williams. Banc of America Securities co-managed Williams' IPO.

Still, some say Williams' best opportunity lies in selling the entire company, not entirely unfamiliar ground. In 1995, as

WilTel

, the company sold its first national fiber-optic network to

LDDS Communications

, which later became

MCI WorldCom

(WCOM)

. Though cashing in its network for $2.5 billion from a telco worked once, Williams' President Frank Semple says he's not building another exit strategy.

Of course not, say analysts. And the nation's biggest local-phone company -- SBC -- is a mere friend holding the second-largest ownership stake and also just happens to be on the verge of needing a long-distance network.

Semple says there are a lot of misperceptions about SBC's 4% stake in Williams. He says SBC is only one of several key partners that include a 2% ownership interest by

Intel

(INTC) - Get Report

and a 1% stake held by

Telefonos de Mexico

(TMX)

. The parent company, gas and oil pipeline operator

Williams Cos.

(WMB) - Get Report

, controls 84% of WCG, and the remaining 7% is publicly held.

"Believe me," Semple says, "SBC has every incentive for us to be successful, load the network and provide an economical service for them as well as everyone else. Our value is not being driven exclusively by SBC, and not at all by the takeout premium."

But in Williams' case, the less Wall Street values new fiber networks, the more big telcos such as SBC are likely to move them toward the top of their shopping lists.