Verizon, MCI may have to sell some assets

Analysts note desire to preserve competition

February 15, 2005|By BLOOMBERG NEWS

To win government approval for its purchase of MCI Inc., Verizon Communications Inc. might have to sell parts of the combined company's telephone network, including assets in the Washington area, analysts said.

Verizon doesn't expect to have to sell assets, Chief Executive Officer Ivan G. Seidenberg said during a conference call with analysts yesterday, hours after the $6.7 billion deal for MCI was announced. But several analysts speculated that there will be a push to force divestitures in markets in the Northeast where MCI offers local phone service.

Regulators at the Justice Department and the Federal Communications Commission who will be looking at the MCI merger and SBC Communications Inc.'s proposed $16 billion purchase of former parent AT&T Corp. will focus on ensuring sufficient competition in certain areas.

Hank Levine, a Washington attorney who represents large corporations in their purchases of telecommunications services, said he expects regulators to look at requiring Verizon and SBC to divest local-network assets of AT&T and MCI in their acquirers' home regions.

The government might require Verizon and SBC to sell the local-residential phone businesses of AT&T and MCI, or their own operations serving corporate customers, said Paul Glenchur, an analyst at Stanford Washington Research Group. Assets to be divested might include customers and network equipment, he said.

Scott Cleland of Washington-based research firm Precursor Group said such divestitures are "possible, but not necessarily likely." Verizon might sell assets in New York, Boston, Philadelphia and Washington, Cleland said.

Levine said he expects competition for corporate clients to increase in the short term because Verizon and SBC are "strong players," although competition might lessen in the long run because those companies aren't entering the market on their own.

"What we'd really like is five large, successful companies slugging it out for our business, speaking for the large customers generally," Levine said. "If we can't have that, we need three or four large providers."

Sprint Corp., which is buying Nextel Communications Inc. for $35 billion, is a "strong third in this market," and Qwest Communications International, which lost in the bidding for MCI, is a "weak fourth," Levine said.

The acquisitions of AT&T and MCI follow FCC decisions last year that made it tougher for the companies to use the regional carriers' networks to compete for residential phone customers. In addition, AT&T said Dec. 15 that an FCC ruling that day might preclude competitors from gaining access to as many as 20 percent of business phone lines in the 50 largest U.S. metropolitan areas.

FCC spokesman Mark Wigfield declined to comment, and Justice Department spokeswoman Gina Talamona didn't return a call seeking comment.

"There are no brick walls, but there are speed bumps," Legg Mason Wood Walker Inc. analyst Blair Levin, a former FCC chief of staff, said of regulatory approvals. "You're taking out the big two consumer competitors to the Bells, both in long distance and in local, and even if you consider them one market, it is still a lot of competition that will not be on the playing field a year, a year and a half from now."

State governments, which might lose phone-tax revenue as companies shift more telecommunications traffic to the Internet, will also review the Verizon-MCI transaction carefully, said Glenchur of Stanford Washington.

"I don't think the states are going to kill these deals, but I think that they could force the duration of the merger review to continue for quite some time," said Glenchur, a former FCC attorney. "That's a real wild card on the timing."

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