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Will Verizon Try to Dial Up a Deal?
AT&T-BellSouth Pact May Spark A New Round of Consolidation Within Telecom, Cable Industries
By Shawn Young, Peter Grant and Dennis K. Berman, Staff Reporters
Monday, March 6, 2006

Wall Street's merger-and-acquisition bankers may already be programming Verizon Communications Inc. into their cellphones.

For a few short months, Verizon and the nation's other major phone company, AT&T Inc., were in detente: Their stock-market values were close each other, and both were digesting massive acquisitions of long-distance firms that rounded out their portfolios of wireless, data and phone services. But investors could find the equilibrium very short-lived if AT&T gets regulatory approval for a $67 billion deal to acquire BellSouth Corp.

That deal could spark a new round of consolidation in the wireless, cable, conventional-phone and telecommunications-equipment sectors as rivals and suppliers prepare to grapple with a behemoth that would control local-phone service in the South, Midwest and much of the West and own the country's biggest wireless operation outright.

Verizon would be most directly affected by a deal between AT&T and BellSouth, which would give AT&T full control of its Cingular Wireless joint venture with BellSouth. Verizon owns 55% of Verizon Wireless and would have added incentive to buy out its partner, Britain's Vodafone Group PLC. Verizon spokesman Peter Thonis says the company is already working to acquire the remaining stake.

"This a logical and predictable move by AT&T," Mr. Thonis says. "This kind of consolidation makes sense, providing new leverage and capabilities as Verizon and AT&T compete against cable. Meanwhile, Verizon's business plan remains unchanged."

Stock investors have been favoring San Antonio-based AT&T, which has seen its stock rise 14% this year, compared with a 12% rise for Verizon, based in New York. AT&T has a market capitalization of $109.9 billion and Verizon has a market capitalization of $98.3 billion. But with AT&T strengthening its grip on wireless, which is a critical source of growth, Verizon could be compelled to come up with another move, according to industry observers.

Now may be the time for Vodafone to accept Verizon's overtures: Just last month the U.K. wireless giant forecast slower revenue growth and tighter profit margins for its fiscal year ending March 31, 2007. Vodafone's American depositary receipts, which traded above $26 as recently as November, were at $21 Friday in New York Stock Exchange composite trading.

Another wireless option Verizon could dial up is Alltel Corp., which has a market value of about $25 billion. The company, based in Little Rock, Ark., serves about 10 million customers, mostly in rural areas and small cities, and competes directly with Cingular in many places. Alltel is in the process of splitting off its less-desirable wireline operations in a deal expected to close this summer. But some observers think its customer base isn't attractive to Verizon.

The AT&T-BellSouth combination also would affect other firms in the conventional-landline business, including Denver-based Qwest Communications International Inc. The company, which serves 16 Western and Mountain states, is the smallest of the regional-phone empires, and it doesn't have its own wireless operation. Qwest, which has a market capitalization of about $12 billion, could become a target for AT&T because it would nearly complete AT&T's geographic footprint. Verizon also could go after Qwest, but some analysts are skeptical, because a deal with Qwest would bring Verizon little growth yet load it up with more debt. Qwest spokesman Bob Toevs declined to comment on takeover speculation.

Analysts also expect an AT&T merger with BellSouth to accelerate consolidation in the cable industry. The most likely buyer is Time Warner Inc.'s cable division, the country's second-largest cable operator, which is expected to add about four million subscribers later this year when Adelphia Communications Corp.'s systems are divvied up between Time Warner and Comcast Corp. As part of that deal, Time Warner is expected to offer stock in its cable unit that it could use as currency in future acquisitions. Likely targets include Cablevision Systems Corp. and Insight Communications Co., which recently went private, analysts say.

AT&T's deal promises to create long-term challenges but short-term opportunities in the cable industry. Over time, the merger will likely turn AT&T into a more formidable competitor. But in the next few years, AT&T presumably would be focused on integrating BellSouth, giving cable operators extra time to offer consumers a bundle of TV, phone and high-speed Internet services before the telephone companies can strengthen their packages.

The BellSouth deal also highlights the current plight of the telecom-equipment industry, whose customers have been consolidating at a ferocious pace but has itself remained impervious to the same forces. A telecom marketplace dominated by AT&T and Verizon would put increasing emphasis on a few key contracts issued by the two giants. One person close to the BellSouth deal foresees a process akin to military contracting.

Should that winner-take-all approach develop, it would certainly push some equipment providers into deals of their own. But some combination of Lucent Technologies Inc., Nortel Networks Corp., Motorola Corp. or Alcatel SA would prove an immensely challenging combination of technology, corporate bureaucracies and international politics.

Write to Shawn Young at, Peter Grant at and Dennis K. Berman at