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Telecom mating season heats up
Merger mania in sector continues, but independents BellSouth and Qwest have nobody to dance with.
February 15, 2005: 12:27 PM EST
By Paul R. La Monica, CNN/Money senior writer
BellSouth's shares have dipped lately but some analysts don't think a merger will help.
BellSouth's shares have dipped lately but some analysts don't think a merger will help.
Shares of Qwest have runup in recent months but Wall Street is worried about what's next since it didn't win the bidding for MCI.
Shares of Qwest have runup in recent months but Wall Street is worried about what's next since it didn't win the bidding for MCI.

NEW YORK (CNN/Money) Poor BellSouth and Qwest. These two telecoms had no merger partners to whisper sweet nothings to on Valentine's Day.

Investors have to be wondering about the future of these companies, the only two remaining independent telecoms of note. All of a sudden, their already-formidable competitors are now even bigger.

There have been three major telecom deals since December: Sprint's merger with Nextel, SBC's acquisition of AT&T, and now, Verizon's purchase of MCI.

"These deals leave standalone entities in a precarious position given likely competition from larger companies," said Todd Rosenbluth, an equity analyst with Standard & Poor's. "BellSouth and Qwest have to decide how important a national presence is."

Analysts are undecided whether BellSouth (Research), the nation's third-largest regional phone company, needs to join the merger fray. The Atlanta-based firm enjoys a strong presence in the Southeast, a hot segment of the U.S. economy.

But Allan Tumolillo, chief financial officer of Probe Financial Associates, an independent research firm focusing on the telecom sector, says it will be increasingly difficult for BellSouth to hold on to local corporate customers, known as the "enterprise market," now that SBC (Research) and Verizon (Research) have both bulked up.

"SBC and Verizon will try and lock down much of the enterprise market," Tumolillo said. "They aren't going to say Atlanta is off limits."

BellSouth can enjoy the single life...

Following the frenzied pace of couplings in the industry during the past few months, there is little left for BellSouth to buy.

Tumolillo said one option for BellSouth would be for it to sell its minority stake in Cingular Wireless to SBC, its joint venture partner, and then make a run at the combination of Sprint (Research) and Nextel (Research) in order to have total control of a larger national wireless firm.

But Scott Cleland, chief executive officer of Precursor, another independent research firm, thinks BellSouth might actually now be in the best position of all the large telecoms.

While everyone else will be facing tricky merger integration issues, BellSouth can focus on gaining customers in higher-growth businesses such as broadband Internet access, wireless and satellite television. BellSouth has a deal to resell satellite TV service from DirecTV.

Cleland adds that the corporate market is not as lucrative as SBC and Verizon are making it out to be since price pressure is as intense as it is in the consumer local and long-distance markets.

"BellSouth will be fine. Personally, I think it's strategically smart of them to not invest in the worst segment of telecom. SBC and Verizon are bottom fishing," Cleland said.

Rick Black, an analyst with Blaylock & Partners, agrees that BellSouth can afford to sit tight and will likely do so. After all, the company has been fairly conservative. It was said to be in serious negotiations to buy AT&T (Research) a few years ago but could not agree on a price.

"BellSouth is not in a rush to do anything, and it's never been a company that has made bold decisions," said Black, adding that the company could eventually wind up being a takeover target of SBC once it has completed the AT&T merger.

...but being spurned by MCI could hurt Qwest

Wall Street didn't seem to be too disturbed about how the Verizon-MCI deal would affect BellSouth either. Shares of BellSouth were up slightly Monday.

But while BellSouth may be able to survive as an independent firm, analysts say Denver-based Qwest faces some tough challenges as a standalone entity.

To that end, shares of Qwest plunged more than 6.5 percent Monday. The smallest of the Baby Bells has been struggling for the past few years due to high-profile accounting problems and sluggish growth prospects.

Qwest had hoped to rejuvenate itself by purchasing MCI (Research) and gaining access to its enviable list of corporate customers. MCI chose, however, to sell itself to Verizon even though Qwest submitted a higher bid. And investors seemed to be counting on that deal.

"Qwest is already a distant also-ran and it has limited ways to improve its growth without buying something else," Black said.

But analysts say there is no company comparable to MCI that Qwest could buy to help it increase its presence in the corporate market. Smaller firms like Level 3 Communications (Research), XO Communications (Research) and Global Crossing (Research) wouldn't add much to Qwest.

What's more, Qwest is not an attractive takeover candidate either, given that it has more than $17 billion in debt.

"Qwest had few options before and now it has fewer options," Cleland said. "People aren't lining up to buy Qwest."

Analysts quoted in this story do not own shares of the companies mentioned. Blaylock & Partners has done investment banking for Verizon, but none of the other firms have done banking for any of the companies mentioned.  Top of page

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