Merged Telcos Will Sport Different Looks
SBC Communications Inc. (NYSE: SBC) will buy AT&T Corp. (NYSE: T) for $16 billion, but Verizon Communications Inc. (NYSE: VZ) will pay only $6.75 billion for MCI Inc. (Nasdaq: MCIP). “Even though directionally both deals have similar impacts (e.g., a slowdown in growth rates), in the case of Verizon the magnitude of the impact is much smaller,” Goldman Sachs & Co. analyst Daniel Henriques says (see Verizon Wins Tussle for MCI and SBC to Buy AT&T for $16B).
Jefferies & Co. Inc. analyst George Notter estimates that Verizon and MCI combined spent roughly $14 billion, or 31 percent of all North American capex during 2004. SBC and AT&T, by contrast, spent roughly $7 billion, or 16.7% of North American capex spending in 2004.
The deals are conceptually similar -- each RBOC is driven by a desire for access to the enterprise market and to take advantage of economies of scale. But the SBC/AT&T combo has a bigger headstart on paper. The SBC/AT&T transaction combines the No. 1 (AT&T) and No. 2 long-distance carriers, which together have a 37 percent market share. In the access market, SBC is the No. 1 consumer DSL provider, serving 5.1 million customers.
The Verizon/MCI transaction will bring together the world’s largest IP backbone (MCI) and the nation’s largest wireless service provider. MCI and Verizon have 11,100 points of presence nationwide, but the duo will be No. 2 in the market to provide telecom services to large businesses.
U.S. companies spend some $138 billion on telecommunications every year and both SBC and Verizon have made plays for that market in the past, but without significant success. Now, as the size and reach of American businesses has grown, so has the size of their telecom spending. Those businesses are also more spread out, and that’s been problematic for regional telephone companies.
“In most [corporate telecom services] deals, more than 70 percent of the contract value must be derived from in-region services,” says Bryan Van Dussen of The Yankee Group. “If the out-of-region contract value exceeds 30 percent, someone like Verizon is likely to walk away from the deal." With the acquisitions of AT&T and MCI, there is no more “out of region” for SBC and Verizon.
“The telecom industry is taking the next logical step forward in terms of size,” says SBC spokesperson Wes Warnock. “You want to be able to do business coast to coast, and you want to have that kind of product scale and scope.”
The megacarrier combos will also save billions a year by owning regional and long-distance networks. UBS analysts estimate that SBC paid Wiltel $1.1 billion in 2004 for long haul, an expense that will go away with AT&T’s nationwide network.
Even now, before the big mergers are completed, the four carriers involved each control large pieces of the enterprise space for voice and data services. AT&T and Verizon each have a 15 percent share; SBC has 14 percent; and MCI has 11 percent, according to The Yankee Group.
— Mark Sullivan, Reporter, Light Reading