BellSouth-AT&T Deal Could Spur More Mergers

If AT&T's flirtations with BellSouth and Comcast result in a union, it may be the dam-bursting event that powers a flood of mergers between regional Bells, long-distance carriers and their strongest competitors, analysts said.

If AT&Ts flirtations with BellSouth and Comcast result in a union, it may be the dam-bursting event that powers a flood of mergers between regional Bells, long-distance carriers and their strongest competitors, analysts said.

"Its only a matter of time before these Bell/long-distance deals happen," said Legg Mason analyst David Kaut. "The question is when, and who pairs with whom."

A BellSouth-AT&T merger would help BellSouth compete for the global business market, because it could offer long-distance services worldwide. It would also give AT&T a monthly billing relationship with millions of paying customers and the infrastructure to bring broadband to the home over DSL, rather than cable.

That would free AT&T to sell its cable unit, AT&T Broadband, to AOL Time Warner, Comcast or Cox Communications. Comcast, which made an unsolicited $44.5 billion offer in July, would be the logical partner, even though the AT&T board last month unanimously rejected the original offer. Comcast is a smaller player than AOL Time Warner, so regulators might look more kindly on a pairing with AT&T Broadband.

AT&T and Comcast executives are expected to sign confidentiality agreements this week, a precursor to their renewing talks about a possible deal for the broadband division. Comcasts earlier offer was reportedly rejected because it was too low, and because AT&T executives were dissatisfied with the amount of voting control the Roberts family would emerge with. The Roberts family owns about 2 percent of Comcast, but has 86 percent voting control. Under the deal, the family would have emerged with voting control of 46 percent to 49 percent, more than AT&Ts board could stomach.

BellSouths assets are a strong customer base, a reliable revenue stream, a relatively stable stock price, good leadership and clear vision, analysts said.

AT&T declined to confirm rumors that top executives are negotiating with BellSouth. But without the cable revenue, the company should be weighing any option that improves shareholder value, sources said, particularly since the Bells are quickly gaining steam in the long-distance market.

"Drip, drip, drip - the long-distance revenues are getting eaten away by competitors," Kaut said. "If you cant beat them, join them."

BellSouth has not been cleared to offer long-distance anywhere in its service region.

The three other regional Bells have already merged with major long-distance players. U S West became Qwest Communications International when it merged with Qwest last year. SBC Communications merged with Ameritech. "Everyone was waiting for BellSouth to make its move," said Robert Saunders, Eastern Management Groups senior analyst.

Saunders predicted that if BellSouth and AT&T merge, AT&T Chairman C. Michael Armstrong will see the deal through and then retire, leaving the helm of the new company to someone from BellSouth

All of the major carriers are positioning themselves for a time - perhaps five or 10 years hence - when most businesses and residences have a broadband connection to the home that delivers data, voice, streaming video, interactive television and gaming services.

Most analysts see a place for several technologies: DSL could do well in urban settings where densely packed houses are within three miles of a telephone companys central office; fixed wireless could dominate in rural settings; and cable, which now owns 70 percent of the residential broadband market, could continue to be a key player.

Mergers between regional Bells and long-distance carriers can be shortcuts to those dreams.

AT&T has too many competing technologies, analysts said. "Letting AT&T Broadband and Wireless go, letting them float free, will let AT&T refocus as a wireline telephone company," Saunders said.

AT&Ts large long-haul network could be an ideal infrastructure for BellSouth as it painstakingly wins federal approval for offering long-distance services in every state. Large enterprises with customers and branch offices all around the country and the world would embrace telecom partners that could let them make inexpensive long-distance calls within a single network.

Analysts predicted that a BellSouth-AT&T deal might clear regulatory hurdles in about 12 or 15 months - about the same amount of time it should take for BellSouth to be cleared to deliver long-distance in its service region, beginning with Georgia.

"It would be a big win for BellSouth," Saunders said in reference to the possible union. "It would certainly bring them out of the small-player category."

An AT&T Broadband-AOL Time Warner merger would consolidate the two dominant players in cable broadband, which already control 70 percent of the broadband-to-the-home market.

"Comcast was a good idea when they floated the trial balloon," Saunders said. "Its probably still a good idea. My gut is that they have a better chance than AOL Time Warner - if they can set aside managerial differences and egos that got in the way the first time."

With or without a cable partner, AT&T is reportedly considering purchasing the parts of troubled Excite @Home that are used to provision broadband access to its customers and other cable companies. That would help keep customers connected if [email protected] falls into bankruptcy.