Cash 'n' Carry
The world of large telecom carriers has become so boring that it’s interesting again.
I'm talking about the old RBOC/ILEC rumor mill. This time, SBC Communications Inc. (NYSE: SBC) is reportedly looking to buy AT&T Corp. (NYSE: T).
It seems as if this rumor has been around since the invention of the telegraph. To recap, both BellSouth Corp. (NYSE: BLS) and SBC have long been interested in AT&T assets, but nobody has ever been able to pull the trigger.
Maybe it’s more serious this time. I still don't think it will happen – though there are plenty of reasons it should.
There have been rumblings of big service provider deals – mostly involving SBC or Qwest Communications International Inc. (NYSE: Q) – since the begnning of the year (see Qwest's Quest to Ditch Its Debt). Yesterday, The Wall Street Journal and The New York Times put some more chicken on that bone with fairly detailed and well sourced information that SBC is interested in AT&T (see SBC/AT&T Could Ignite M&A Frenzy).
The SBC and AT&T news happened to drop the day Verizon Communications Inc.’s (NYSE: VZ) earnings were announced… relegating Verizon’s story to the back pages somewhere near the obituaries.
How convenient, if, say, you were curious to see how the market would react to such a combination (see Call the Plumber!).
It's clear as day to everybody that more of these deals – rumored, proposed, and actually consecrated – are going to come. Everybody knows the problem is too much competition. Consolidation makes sense.
But the real reason they are going to happen – other than the fact that the RBOCs might be feeling a tad desperate and bored – is the cash.
Large RBOCs such as SBC, Verizon, and BellSouth have spent the last few years cleaning up their balance sheets and improving their cashflows. And those cashflows have improved substantially – thanks mostly to cuts in capital spending and labor costs – which means these companies are now generating substantial cashflow surpluses.
What to do with all that cash? Verizon and SBC are already paying 4 to 5 percent dividends, well above the rate at your local savings account, so no problems there.
They could take the excess cash and invest it in new services in equipment (capital spending), which they are likely to do. But with the bad memory of overspending from the bubble still with them, they're likely to be conservative in expanding their capex budgets.
At the same time, the RBOCs and shareholders are frustrated that their stock prices can’t move – at least in the right direction. So they toy with ideas – anything, really – of how to generate growth.
The pressure to cut deals is mounting. The cable companies are running right at them. The consumer voice business is drying up. They've got to figure out video.
So really, they are left with the final option: Use their cash (or stock) to buy other companies. It's the quickest and easiest path to growth and consolidation.
So here you have SBC proposing an AT&T merger, only to see its stock take quite a nasty hit on the news. Ho-hum. Is boredom the solution to boredom? Will the market look for a more exciting combination? It may just have to. This deal’s a real yawner.
I don't think it will happen. But stay tuned – there’s more to come.
We may just be hitting the fulcrum point: When the Fat Cats get bored, the bored go shopping.
— R. Scott Raynovich, US Editor, Light Reading