BellSouth at a Crossroads

SBC Communications Inc.'s (NYSE: SBC) move to purchase AT&T Corp. (NYSE: T) for $16 billion will make the combined firm the largest telecommunications company in the U.S. (see SBC to Buy AT&T for $16B). Don't think this isn't the first thing on other RBOCs' minds.

To boot, take this: The deal will also likely catapult SBC/AT&T to the second largest service provider in the world, behind only Japan's NTT Group (NYSE: NTT).

SBC’s RBOC competitors BellSouth Corp. (NYSE: BLS), Qwest Communications International Inc. (NYSE: Q), and Verizon Communications Inc. (NYSE: VZ) have been put on notice -- as SBC/AT&T moves to improve its long-haul capacity and benefit from economies of scale (see Execs Explain SBC, AT&T Pairing). BellSouth, in particular, may be feeling pressure because of its Cingular Wireless LLC partnership with SBC (BellSouth is the minority owner with a 40 percent stake; SBC owns the rest). By adding AT&T’s network, SBC will compete with BellSouth for out-of-region long distance, enterprise customers, VOIP, and broadband services.

“BellSouth has to be concerned and upset,” says Telecom Pragmatics Inc. principle Sam Greenholtz. “They were trying to purchase AT&T and have been knocked out by SBC." He says the pressure to do something has been kicked up a notch.

In fact, many see BellSouth as having lost the last move in the leg of the chess match, victim of SBC's aggressive play for power.

”I agree that BellSouth might be upset about the SBC/AT&T merger, but they had to see it coming,” says Tavis McCourt, senior telecom analyst at Morgan Keegan & Company Inc. “BellSouth had the opportunity to buy AT&T and didn’t do it. They knew AT&T was shopping itself and decided not to make a move.”

Besides, McCourt says, the SBC/AT&T deal is more focused on bringing SBC up to speed in the enterprise arena, an area not a traditional stronghold for BellSouth. “The SBC/AT&T deal doesn’t really affect BellSouth’s bread and butter, which is consumer and small business services,” McCourt says.

But with flat revenue growth in its wireline market and a strong dependence on profits from Cingular, which it shares with SBC, many agree that BellSouth will have to do something to remain competitive (see BellSouth's Earth Is Flat). BellSouth had no comment for this story.

McCourt sees BellSouth as being “kind of stuck” with the position its in, although he notes that's not such a bad thing, because it’s the dominant carrier in the fastest growing region of the U.S. “Unlike SBC and Verizon, which are in areas with declining populations, BellSouth is in a good position because of the population growth in its region.”

But Telecom Pragmatics’ Greenholtz disagrees. “Right now I consider them No. 4,” he says. “Even Qwest has its own network and is in a better position in the enterprise space than BellSouth.” So what are the options for BellSouth moving forward?

Many analysts have predicted that the SBC/AT&T merger will set off a run of M&A activity, but McCourt believes it unlikely BellSouth will get in on the action (see SBC/AT&T Could Ignite M&A Frenzy). In the wireless arena, he says it will be tough for BellSouth to shed its Cingular stake and buy its own wireless provider. “There’s really no one out there they could buy for wireless,” he says. Sprint Corp. (NYSE: FON) would make an attractive partner for BellSouth, something that would give the company a boost because of its extensive wireless and long-haul wireline network.

“It’s a long shot, but if they asked me, I’d tell them to go for Sprint,” says Greenholtz.

In the enterprise arena, BellSouth may take a look at acquiring MCI Inc. (Nasdaq: MCIP), but McCourt predicts that the company will stand pat for now and work at paying down its debt. “Historically, they have been much less acquisitive and more financially disciplined. They might look at MCI, but if Verizon decides it wants MCI, it could outbid BellSouth.”

BellSouth might be in a better financial position to make an acquisition than Verizon, which is focusing its investment on FTTH and IP initiatives. BellSouth has less debt than Verizon and probably wants to avoid a bidding war. Still, most analysts admit that Verizon is probably reconsidering its position in light of the new megamerger.

Should BellSouth panic? Not really. Given the plentiful availability of telecom assets out there, it could get creative and patch together assets to build a bigger business. Or it could buy a medium-sized independent carrier such as Level 3 Communications Inc. (Nasdaq: LVLT).

— Chris Somerville, Senior Editor, Next-Generation Services

minnecool 12/5/2012 | 3:28:05 AM
re: BellSouth at a Crossroads I love you guys, always thinking in terms of assets in the ground. SBC bought AT&T, not for its network or name. It is buying the customers - the only metric of any really value in the telecom universe.

BellSouth or any of the others would never consider the empty shells of Global Crossing, Level 3 or the other fiber players that have worthless network and no customers.

SBC is taking a "first mover" advantage in the massive restructing of the carrier business and they will be a big winner. The cost savings alone pays for the acquisition, but the real payoff is being king of the hill with the best customers while the others scramble for partners in the merger frenzy. The result? Fewer companies, firmer prices, and greater marketshare for the new SBC-ATT.

BellSouth and Verizon must respond. Verizon will take MCI and be done with it. BellSouth must make a bold stroke to stay in the game - How about a Qwest-Sprint takeout? That would be very interesting. The XO's and 360's are done, toasted. What few customers remain will run to one of the remaining Big Three

fgoldstein 12/5/2012 | 3:28:00 AM
re: BellSouth at a Crossroads I agree with reg; acquisitions aren't always successful. AT&T's own record stinks. SBC has mostly acquired monopolies and kept them as monopolies (horizontal expansion), hardly a great feat. Keeping the whole thing going during and after the acquisition is not trivial, and market share will be lost. Look at Compaq-HP, for instance; their combined market share is below the sum of the two.

BellSouth's trick to date has been easy and hard. Easy, because it has been to stick to their knitting, avoid much M&A, concentrate on the business they're in, and operate at a reasonable profit without undue risk. In other words, they're acting like a telephone company, and doing it fairly well. Hard, because too many clowns on The Street are enamored of the fast bucks of M&A deals, even if the long term consequences leave shareholders, employees and customers alike as the bagholders. So BellSouth has to convince them that doing what they do better than most is, well, good enough.

Management by compulsion, again, something that Ed and Ivan can't resist.
reg64 12/5/2012 | 3:28:00 AM
re: BellSouth at a Crossroads A few good points being made, however I would not be so quick to jump on the ever present position of entitlement that the RBOCs continue have. SBC will certainly pull a sizable customer base via ATT, but keeping them will certainly be another issue. Especially when you consider their predictable snail's pace in embracing and deploying full IP services to that same market.

I would not be so quick to rule out a facilities base provider such as XO, especially when you consider that they are currently rolling VoIP aggressively through this year. The dollars saved is just too hard to ignore. When will SBC mass market these services? Probably as slowly as possible........they will not be as bulletproof as you might think.
ironman 12/5/2012 | 3:27:58 AM
re: BellSouth at a Crossroads There really shouldn't be any surprise here with SBC strengthening its portfolio. BellSouth and Verizon will have plenty of time for personal grooming and shouldnGÇÖt be in any haste until the SBC & AT&T deal is officially sanctioned.

This really isn't so much a crossroad as it is a necessity for SBC. Buried here is SBC's sloth like nature and it's necessity for growth (let alone maintaining), which would not be possible in with the previous business model.

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