Dial B for Buy
Analysts say several other telecoms look attractive in the wake of the AT&T-BellSouth merger
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AT&T's (Research) $67 billion deal for BellSouth (Research) has investors excited -- and the telecom sector is hot on Wall Street again. Telecom stocks have been mostly in the doldrums the past few years. Investors soured on them after the dot-com bubble burst and concerns grew about slowing growth and increased competition.
But shares of Sprint Nextel (Research), Alltel (Research) and Baby Bell Qwest (Research) all shot up Monday morning on speculation that they could be the next telecom to be acquired. Verizon (Research) has been mentioned as the most likely suitor for all three.
Alltel and Sprint were viewed as being the most attractive to Verizon because of their strong wireless businesses. Qwest does not own its own wireless network and the company is viewed by many analysts as having the weakest competitive and financial position of the major telecoms.
"Alltel is a strategic asset with regard to its wireless business and balance sheet. The same applies to Sprint," Merrill Lynch analyst David Janazzo wrote in a report Monday.
Yet Qwest could still be attractive prey for Verizon, said Pete Wilson, vice chairman of Telwares, a telecommunications research and consulting firm.
Wilson argues that Verizon may want to go after Qwest if for no other reason than to keep that company, which has a local presence in several Midwest and Rocky Mountain states, from eventually being bought by AT&T.
"For Verizon, there is more of sense of urgency to possibly buy Qwest. Just look at the map. Even though Qwest doesn't bring a lot to Verizon, it can't let Qwest fall into AT&T's hands," Wilson said.
Verizon and Sprint may be able to sit tight...
But other analysts caution that any deal by Verizon isn't likely to take place until the company first buys out the 45 percent stake that British telecom Vodafone owns in Verizon Wireless. The two companies have been negotiating about such a deal for the past few years.
"Verizon has long tried to buy the minority stake from Vodafone so we don't think any other deal by Verizon is going to happen in the near term," said Todd Rosenbluth, an equity analyst with Standard & Poor's.
Still, Rosenbluth said, several telecoms are worth buying as a result of the AT&T-BellSouth deal.
He said Verizon, for one, could be able to take advantage of the fact that AT&T has a lot of difficult merger issues to deal with. After all, Cingular, the wireless company that's co-owned by AT&T and BellSouth, just bought AT&T Wireless in 2004, and AT&T and SBC only completed their own merger a few months ago.
"AT&T is still integrating the wireless merger of Cingular and AT&T Wireless and the SBC-AT&T deal," said Rosenbluth. "I think Verizon is going to benefit in the near-term from turmoil."
Tim O'Brien, manager of the Evergreen Utility and Telecommunications fund, agreed that Verizon shouldn't feel forced to make a deal because of the AT&T-BellSouth merger.
"Everybody knew that SBC and AT&T and BellSouth would eventually get together. This is one of the telegraphed mergers in history," said O'Brien, who owns BellSouth, AT&T and Verizon in his fund. "This won't motivate Verizon to do anything that they weren't thinking about anyway."
For its part, Sprint Nextel may also not need to either sell out or make any acquisitions, said Bill Lesieur, director of Technology Business Research, an independent research firm.
Sprint is an intriguing wild card in the rapidly changing telecom landscape because the company is partnering with cable giants such as Comcast, Time Warner and Cox to offer wireless telecom services for these companies. (Time Warner also owns CNNMoney.com.)
The cable firms have become increasingly competitive in telecom, with products such as high-speed Internet access and digital phone offerings eating into the subscriber bases of the traditional telecoms. Sprint Nextel also enjoys a solid reputation with corporate customers in wireless due to the Nextel acquisition, Lesieur said.
"One thing that doesn't seem to be coming up too much with all the talk about the AT&T-BellSouth deal is what it means for Sprint Nextel. This new AT&T seems to be focused on Verizon but Sprint Nextel is a powerful combination in business market and competitors can't ignore that," he said.
Smaller telcos and DISH could benefit
In addition, Rosenbluth said that smaller rural telecoms like CenturyTel and Commonwealth Telephone Enterprises are good bets because they won't face as much competition from larger telecoms like AT&T and Verizon or the cable firms.
"The rural phone companies do not face the same pressure as other telecoms. Competition from AT&T and cable isn't impacting things as much," said Rosenbluth. "It's better for investors to aim toward the hinterlands."
O'Brien said smaller wireless companies like Ubiquitel, Dobson Communications and Centennial Communications Corp. could also be intriguing takeover targets as the wireless business continues to consolidate. "The AT&T-BellSouth deal is as much about wireless as it is about anything else," he said.
Finally, Thomas Eagan, an analyst with Oppenheimer & Co., said that another savvy way to take advantage of the AT&T-BellSouth deal is to look at satellite TV firm EchoStar.
The nation's No. 2 satellite TV firm has a business partnership to resell satellite TV with AT&T. BellSouth has a similar joint venture with DirecTV but Eagan said AT&T would likely switch BellSouth over to EchoStar after the AT&T-BellSouth deal is completed -- assuming it's approved by regulators.
Plus, Eagan said that AT&T, after absorbing BellSouth, could be more likely to just outright buy EchoStar in order to become a more legitimate competitor to cable firms on the video front. Rumors of an AT&T deal for EchoStar have been making the rounds on Wall Street for the past few months.
"The bigger the footprint that AT&T has, the more cost effective it is for the company to buy a national video provider like an EchoStar," Eagan said.
For a look at how Ma Bell has been reborn, click here.
How will the AT&T-BellSouth deal affect consumers? Click here.
For more about how the deal will impact jobs, click here.
For a look at more telecom stocks, click here.
A member of the Merrill Lynch telecom research team owns shares of AT&T and the firm has done investment banking for AT&T and Alltel. Other analysts quoted in this story do not own shares of the companies mentioned and their firms have no investment banking ties to the companies.