Qwest holds stake in AT&T stock meeting
Shareholders in Denver are set to back the SBC merger, while Qwest scrambles to survive in an increasingly consolidated industry.
By Ross Wehner, Staff Writer
Denver Post
Monday, June 26, 2005

AT&T, the mother of all phone companies, chose Denver by chance as the site for what will probably be its final shareholder meeting Thursday.

But the stakes of the meeting are huge for Denver-based Qwest because AT&T's shareholders are expected to approve a $16 billion merger with SBC Communications, forming the largest telecommunications company in the nation.

The deal, along with the upcoming Verizon-MCI merger, represents an unprecedented consolidation of the telecom industry that has so far sidelined Qwest.

Both deals should gain regulatory approval in the next six months to a year.

Qwest dropped out of a bidding war for MCI last month after the MCI board rebuffed it four times in favor of lower bids from Verizon.

"Qwest faces added pressure after losing MCI," said Standard & Poor's analyst Todd Rosenbluth.  "Qwest is on the outside looking in at a soon-to-be-consolidated telecom market."

New connections

Here's what the new telecom landscape will look like:

SBC and Verizon will be able to compete in Qwest's territory for business customers by offering the two most far-reaching national telecommunications networks.

They could poach Qwest's residential customers by bundling wireless and long-distance.  They could offer Internet phone service over Qwest's DSL lines at the same time that cable companies such as Comcast also are munching on Qwest's broadband customers.

SBC and Verizon already own the two largest wireless operations in the United States and control nearly two-thirds of local-phone lines nationwide.  The mergers will further boost their financial mass, customer base and technological firepower in relation to Qwest.

Each of the new companies will have market values more than a dozen times greater than Qwest, which is burdened with $17.3 billion in debt.  SBC in particular will benefit by integrating AT&T's CallVantage Internet phone service and reviving AT&T's remaining 23 million residential long-distance clients, Rosenbluth said.

"SBC and Verizon, with these mergers, are becoming worldwide telecom players", said Janco Partners analyst Donna Jaegers.  "Qwest is stuck in the rural local-phone league."

Qwest chief executive Richard Notebaert has been one of the most vocal critics of the SBC and Verizon mergers.  At the same time, he is shopping for assets that may help Qwest become what he calls the "third leg of the stool" in the increasingly consolidated industry.

One of Notebaert's main arguments before regulators is the hotly contested idea that the SBC-AT&T and Verizon-MCI mergers are restitching the 1984 breakup of the AT&T monopoly.  In the process, Notebaert claims, businesses will see fewer choices - and higher prices.

"When five of the seven companies that resulted from the breakup of the AT&T monopoly are reconfigured into two companies that will control the business wire-line market, that's a duopoly," wrote Notebaert in a letter last month to The Wall Street Journal.

SBC and AT&T disagree.

"The competitive landscape has changed radically since the breakup of the Ma Bell system," said SBC spokesman Joe Izbrand.  "The argument just doesn't wash."

"The current industry restructuring is a far cry from putting back together the Ma Bell system," said AT&T spokesman Andy Backover.

Both Izbrand and Backover point to an increasingly fragmented and technology-driven marketplace that includes cable companies that offer phone service, cellphone companies that allow consumers to ditch their land lines and a growing bevy of Internet phone companies that compete across the nation.

Phil Weiser, an associate professor of law and telecommunications at the University of Colorado, sees both sides of the argument.

The good and the bad

"On the consumer side, wireless, cable and other broadband providers offer competitive alternatives," Weiser said.  "But the consolidation of networks in the business market is a huge concern."

A recent study sponsored by Qwest found that SBC and Verizon will control access to more than nine out of 10 office buildings in Chicago and Los Angeles, two cities that lie within SBC and Verizon territory.

Notebaert has predicted that the SBC and Verizon mergers will be approved.  His strategy, at this point, is to convince regulators that the telecom titans need to divest overlapping network assets, which Qwest could then buy to beef up its own money-losing national fiber-optic network.

"With MCI, Notebaert failed to win the whole business," Rosenbluth said.  "Now he is looking at picking up the pieces.  But is it going to be sufficient to improve Qwest's operations?"

AT&T, the 120-year-old phone company that monopolized U.S. phone service for years as the largest company on the planet, has held past meetings in Denver in 1972 and 1988.

But this Thursday's event came about by chance.  The company could not fix a meeting date until merger documents were approved last month by the U.S. Securities and Exchange Commission.  The Colorado Convention Center was one of the few facilities that was still available.

"This meeting is a very sad and ironic demise of what was once America's greatest corporation," Weiser said.  "It's a demise that has been 50 years in the making that has resulted from deregulation, technological change and management mistakes."

Staff writer Ross Wehner can be reached at 303-820-1503 or rwehner@denverpost.com.

Consolidation in the telecom industry, including an expected merger between SBC and AT&T, presents a threat to Denver-based Qwest.  These figures show how these companies compare in traditional access lines.  Competition for wireless customers is nationwide.


Access lines (local customers):  52 million
Long-distance customers:  22 million
Wireless customers:  50.4 million (Cingular)
Revenues:  $41.02 billion

Access lines (residential only):  15.1 million
Long-distance customers:  6.5 million
Wireless customers:  50.4 million 
     (Cingular 40 percent-owned by BellSouth, 60 percent SBC)
Revenues:  $20.42 billion

Access lines (local customers):  15.3 million
Long-distance customers:  4.6 million
Wireless customers:  743,000 (Sprint reseller)
Revenues:  $13.78 billion

Access lines (local customers):  51.1 million
Long-distance customers:  18 million
Wireless customers:  45.5 million
Revenues:  $72.41 billion

Source:  John Wenzel, Denver Post research and Jonathan Moreno, Denver Post