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Hanging up on the new Ma Bell
SBC has joined forces with AT&T and taken its name...but the growth still isn't there.
December 1, 2005: 2:13 PM EST
By Paul R. La Monica, senior writer

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Hanging up on telcoms: The past few years haven't been kind fo telecom stocks. But SBC, now known as AT&T, has fared even worse than fellow Dow component Verizon.
Hanging up on telcoms: The past few years haven't been kind fo telecom stocks. But SBC, now known as AT&T, has fared even worse than fellow Dow component Verizon.

NEW YORK ( Ma Bell is back. But it almost seems like she never left.

SBC, the Baby Bell that was spun off during the AT&T breakup in 1984, agreed to buy AT&T earlier this year. But SBC decided to hold onto the old AT&T name for the combined company.

The deal was completed in November and shortly after closing, SBC got rid of its "SBC" ticker symbol. Effective Dec. 1, the new AT&T (Research) even adopted Ma Bell's old "T" ticker symbol.

So SBC no longer exists. It's now AT&T. Get it?

Lots of static

But can the new AT&T do any better in the cutthroat world of telecom than the old one, or for that matter, the standalone SBC, did? Analysts are skeptical.

Investors looking for the merger to quickly boost profits through cost cutting may be in for a surprise.

"We think full realization [of cost-saving efforts] may not come until 2009 or beyond, which is a long time in this industry," wrote Dave Novosel, an analyst with fixed-income research firm Gimme Credit in a recent report.

The other rationale behind SBC buying AT&T was that SBC would be able to bolster its presence with so-called enterprise accounts, large national corporations buying long-distance and data services.

SBC, like fellow Baby Bells Verizon (Research), BellSouth (Research) and Qwest (Research), had struggled to extend its corporate business beyond local regions. AT&T and its rival MCI (the former WorldCom) remained tops in the enterprise game.

But holding on to AT&T's enviable list of Fortune 500 clients won't be easy. With MCI (Research) being bought by Verizon, one analyst said he thinks that the competition between the new AT&T and Verizon could be brutal.

After all, the old AT&T and MCI often had to resort to price wars in order to hold onto enterprise business and that's a big reason why revenues at the old Ma Bell had started to decline.

"It's possible that Verizon and AT&T will come to unwritten terms on having their own fiefdoms and not killing each other," said Patrick Comack, an analyst with Zachary Investment Research. "But these guys are going to be shooting for national accounts and I don't see how they avoid bumping heads in a serious way."

Wireless weakling

Another analyst points out that as a result of the merger, AT&T will not have as big a presence in the more lucrative wireless market. SBC co-owns Cingular Wireless with BellSouth but the old AT&T unloaded its wireless unit a few years ago and was left with mainly consumer long distance and corporate divisions.

"We remain concerned with AT&T's higher exposure to the declining enterprise long distance market as well as its moderately aggressive broadband strategy which dilute the benefit of Cingular," wrote Kevin Moore, an analyst with Wachovia Capital Markets, in a recent report.

Moore estimates that the new AT&T will generate less than a quarter of its sales and about 21.5 percent of its earnings before interest, taxes, depreciation and amortization (EBITDA) from the Cingular wireless business.

By way of comparison, BellSouth generates about 41 percent of its total revenue and 31 percent of EBITDA from wireless, Moore estimated.

Comack added that investors considering bets in telecom should focus on companies that have stronger wireless businesses. He said that in addition to competition from Verizon's wireless unit, the new AT&T will face increased pressure from Sprint Nextel (Research) and the group of top cable companies that are partnering with Sprint to offer their own wireless service.

"If you are going to be in telecom at all, you want to be in wireless stocks. There is no reason to be an investor in SBC/AT&T," he said.

And if competition from other big phone and cable companies wasn't bad enough, AT&T also has to contend with a host of new challengers such as Internet phone companies Vonage and Skype, which is now owned by eBay (Research). Search giants Google (Research) and Yahoo! (Research) could become a force in the so-called voice over Internet protocol (VoIP) market as well.

To be sure, the new AT&T has a VoIP offering of its own. But Victor Schnee, president of Probe Financial Associates, an independent telecom research firm, said that the toughest task for the new AT&T will be trying to expand in emerging telecom businesses like VoIP and digital television services while also dealing with the integration of the more mature assets from the old AT&T.

"This is a work in progress," said Schnee. "They are struggling with how do they modernize and take advantage of new growth markets. It's hard to get excited about closing the AT&T deal."

Other telcos are better bargains

Of course, some might argue that all these risks are already priced into the stock. AT&T, after all, trades at just 14 times 2006 earnings estimates. But that's not exactly a bargain considering that analysts expect earnings to increase by just 6.7 percent next year.

BellSouth also trades at 14 times next year's profit projections but analysts expect earnings to increase by 11 percent. And even though Sprint Nextel trades at a premium of 16 times 2006 estimates, it also looks like a better bet than AT&T since its profits are expected to increase by nearly 14 percent next year.

Given its prospects, the new Ma Bell looks an awful lot like the old Ma Bell. And that's not a good thing.

For a look at more telecom stocks, click here.

Latin American telecom stocks have been winners this year. Click here.

Analysts quoted in this story do not own shares of the companies mentioned. Wachovia has done banking for AT&T, BellSouth and Qwest The other firms do not have investment banking ties to the companies.

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Written by: Paul R. La Monica
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