Phone industry is running out of deals

March 07, 2006|By JEFFRY BARTASH | JEFFRY BARTASH,MARKETWATCH

WASHINGTON -- After a decade of deal-making, the phone industry is running out of buyers and sellers.

The latest deal, AT&T Inc.'s agreement Sunday to buy BellSouth Corp. for $67 billion, would remove one of the few major targets left in the phone business. BellSouth, the dominant local carrier in the South, may be the best-managed phone company in the United States.

Its key asset, though, was its 40 percent stake in the fast-growing Cingular Wireless, the nation's biggest wireless phone provider. Since AT&T owned the other 60 percent, it made perfect sense that those companies were most likely to merge next. Industry analysts have been predicting such a move for several years.

If BellSouth is removed from the picture, the most attractive takeover candidate would probably be Sprint Nextel Corp. Other promising targets could include Alltel Corp., T-Mobile International AG or even Qwest Communications International Inc. Shares of those companies rose in trading yesterday.

Beyond those companies, the pickings are slim. Most major phone companies already have been snapped up - the most recent being the old AT&T Corp., MCI Inc. and Nextel Communications Inc. Some of the potential targets, however, could present regulatory, technological or financial hurdles.

After it acquired Nextel this past summer, Sprint solidified its spot as the third-largest wireless firm in the United States, with expected revenue of more than $46 billion in 2006, according to Thomson Financial.

The Nextel deal reduced the number of national wireless carriers to just four from six a few years ago.

Yet any deal that cuts the number to three would certainly face intense scrutiny. Regulators would be particularly wary of a deal involving Sprint and the No. 1 and No. 2 wireless carriers, AT&T and Verizon Communications Inc.

As it stands now, only Verizon, the dominant carrier in Maryland, could be considered a possible suitor. AT&T will be busy integrating BellSouth, and then there's the technological hurdle: Cingular Wireless, owned by AT&T and BellSouth, runs on a different standard of transmission than Sprint Nextel. Solving that problem could cost a bundle.

Verizon is technologically compatible with Sprint, but Verizon has its sights set on acquiring full control of its own wireless business.

Vodafone PLC owns a 45 percent stake in Verizon Wireless, the No. 2 mobile operator in the United States, and it will cost tens of billions of dollars to buy off the stake of the British wireless company, the world's second largest.

"We are focused on integrating MCI, divesting our directories business and working to acquire from Vodafone the remaining 45 percent of Verizon Wireless," a Verizon spokesman said yester- day.

If and when that transaction takes place, T-Mobile, owned by Germany's Deutsche Telekom AG, could become a potential target. T-Mobile is the smallest of the four national wireless carriers in the United States.

To its advantage, it uses the same GSM wireless standard as Vodafone. So Vodafone could quickly regain a foothold in the key U.S. market if it sold its stake in Verizon Wireless.

It's always possible that Verizon could cast a glance at Alltel, of Little Rock, Ark., which mostly targets rural areas and midsize cities.

Alltel actually covers more territory with its wireless network than any other carrier, but there are fewer people living within its coverage area.

This spring, Alltel plans to spin off its local telephone business as an independent company - turning itself primarily into a mobile operator.

While its wireless business is expanding rapidly, Alltel's traditional phone business has stagnated. The result of the spinoff, not surprisingly, will make Alltel a more compelling target for Verizon.

The companies use the same CDMA wireless transmission standard and have a long-standing roaming or network-sharing deal in place.

Of all the potential targets, Qwest might be the least attractive. It does not own a wireless business, hasn't made money in several years and still owes more than $14 billion in long-term debt.

The Denver company also has a more expansive and costly territory to serve: 14 Western states with far-flung populations.

"I can't imagine why anyone would want to buy Qwest," said Nancy Havens-Hasty, president of Havens Advisors LLC, a hedge fund in New York.

In light of its predicament, Qwest could be an acquirer. Chief executive Richard C. Notebaert has consistently said that his company would look to buy discounted assets from big carriers such as AT&T and Verizon when they seek regulatory permission to acquire other phone companies.

As with Verizon's recent acquisition of MCI Inc., Qwest can be expected to lobby Washington to force AT&T and BellSouth to spin off some of their assets to win approval for their deal.

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