Static for AT&T
Stock Spotlight: Ma Bell is remaking itself but investors worry it'll be too distracted by merger integration to fend off the competition.
By Christian Zappone, staff writer

NEW YORK ( - It's deja vu all over again for AT&T.

The telecom giant said in March that it was planning to buy BellSouth for $67 billion. And once that deal is completed, the company formerly known as SBC will be more than half way towards rebuilding the old Ma Bell phone monopoly that was broken up by federal regulators in 1984.

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But investors are starting to wonder if the new AT&T (Research) is biting off more than it can chew.

San Antonio-based AT&T has grown by leaps and bounds, thanks to an aggressive acquisition spree led by CEO Edward Whitacre. AT&T has the largest stock market worth of any telecom company and is the second-largest by revenues, trailing only Verizon (Research).

AT&T's stock has done well so far this year, gaining about 6 percent. But the stock has cooled since the company announced the BellSouth deal, falling 8 percent since early March on growing concerns about competition as AT&T fights off traditional phone companies like Verizon and new threats from cable firms.

So when AT&T reports its first-quarter results on April 25, investors will be eager to hear more about the competitive landscape as well as how AT&T plans to deal with the challenge of integrating BellSouth (Research). After all, the SBC-AT&T deal just closed last November.

Does bigger mean better?

The BellSouth purchase will give AT&T a firmer grip on the wireless market since AT&T will now have full control of Cingular Wireless, which was a joint venture of the two companies.

AT&T should also have a better chance to win business from large corporate customers in the lucrative Southeast where Atlanta-based BellSouth has a major presence.

After the merger, scheduled to close next March, the company will have about a 60 percent share of the large corporate telecom business, according to analyst Patrick Comack of Zachary Investment Research. Analysts said the new AT&T's sales should be split roughly evenly between its three top businesses: wireless, consumer and corporate.

The deal could also help AT&T since BellSouth was already the best performing of the Baby Bell phone companies, said Christopher King, an analyst at Stifel Nicolaus. To that end, BellSouth reported better-than-expected first-quarter sales and profits on Thursday.

But some analysts are skeptical of how beneficial the deal will really be for AT&T. The company has said it expects $18 billion in savings, with half of that coming from the 10,000 job cuts the company announced from the merger.

King, who said cost savings could be ambitious, believes the company will wind up eventually cutting just $10 billion in costs. AT&T gives no date by which the savings will occur.

Costs from merger integration may hurt the stock in the near term as well. And Joe Bonner, an analyst with Argus Research, contends that while gaining full control of Cingular is a smart move for AT&T, getting bigger is not necessarily going to help AT&T fight off competition.

"Like others, I'm pretty skeptical about the merger," said Bonner. "The company is already huge. How much 'huger' can you get?"

Competition is fierce

AT&T faces brutal competition in the consumer market as cable and Internet companies move into the traditional phone market.

Digital phone services, or voice over Internet protocol (VoIP), are eating into revenue at AT&T's consumer voice business. Cable companies are also entering the wireless market through a partnership with Sprint Nextel (Research).

For its part, AT&T is fighting back. It has a marketing deal to offer satellite TV firm EchoStar (Research)'s DISH network to customers, and is also working on rolling out its own Internet video product.

Zachary Investment's Comack believes the BellSouth deal should improve AT&T's position in an industry roiling from technological changes, noting the combined company will rely less on the traditional consumer business.

King adds that AT&T is "holding their own against competitors" and other analysts note AT&T still has strong corporate and wireless businesses.

But some investors are concerned about market share losses in wireless to Verizon as well as increased pressure from Verizon in the corporate market now that Verizon has bought MCI.

In other words, phone companies and cablers like Comcast (Research) are all chasing the same customer, making the future shape of the industry difficult, if not impossible, to predict.

Growth on hold

With all this in mind, does it make sense for anyone other than the proverbial widows and orphans that own AT&T to take a gamble on the stock?

Tim Horan, an analyst with CIBC World Markets Corp. said that the stock, trading at about 13 times 2006 earnings estimates, is "pretty inexpensive", especially when you factor in a hefty dividend yield of 5 percent.

And according to consensus estimates, AT&T's earnings are expected to grow about 8 percent a year, on average, for the next three to five years. Verizon, by contrast, trades at about the same multiple as AT&T even though its long-term projected earnings growth rate is 3 percent.

But Sprint Nextel and Comcast are expected to grow much faster than AT&T. Analysts are forecasting 15 percent annual earnings increases for Sprint Nextel and 20 percent for Comcast.

More troubling: AT&T revenues, excluding acquisitions, are expected to be flat this year and grow only about 3 percent next year.

Still, Comack at Zachary Investments thinks that growth in the wireless and corporate business should be enough to offset declines in the consumer land-line business. But he concedes that AT&T will probably never be a company that generates double-digit earnings growth again.

So AT&T may be making the right moves for the long-term to adapt to the ever-changing telecom landscape. But it's far from certain whether that will pay off for shareholders anytime soon.


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Analysts quoted in this story do not own shares of AT&T and their firms do not have investment banking relationships with the company. Top of page

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