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Telecom stocks end mostly lower
By Jeffry Bartash, MarketWatch
Last Update: 4:56 PM ET Jan. 28, 2005
WASHINGTON (MarketWatch) - Aside from a pocket of strength in the phone sector, most telecommunications stocks retreated mildly to close out Friday trading.
MCI Inc. (MCIP, news, chart, profile) rose 2 percent to $19.68 in the wake of speculation that the company could be a buyout target if AT&T (T: news, chart, profile) is acquired by SBC Communications (SBC: news, chart, profile).
AT&T shares surged on Thursday after The Wall Street Journal reported that merger talks were heating up. The stock was up again Friday, adding 11 cents to $19.71.
If a deal is reached, the merger would give SBC coveted access to the corporate-services market. It would establish SBC as the biggest U.S. phone company and the first to command a major presence in all the key industry segments.
Under such a scenario, pressure would likely intensify on SBC rivals Verizon (VZ: news, chart, profile) and BellSouth to obtain bigger access to the corporate-services market, probably through an acquisition of MCI Inc. Shares of MCI rose 65 cents to $19.31.
"We believe it is difficult to see Verizon standing still as SBC moves to dominate the corporate telecom market," UBS Warburg told clients Thursday.
Question marks
Still, the deal is by no means risk-free to SBC. AT&T is a fading American icon whose revenue is expected to fall to as little as $25 billion in 2005 from a peak of $50 billion just five years ago.
Lacking a wireless arm and stuck with a steadily eroding long-distance business, the 120-year-old Ma Bell faces a bleak future of ever-dwindling sales and profits. Revenue in 2005, for example, could fall by as much as $5 billion to $25 billion.
Some analysts question whether SBC could right the ship, noting that BellSouth backed off from acquiring AT&T several years ago after a close examination. SBC would be paying a much lower price than BellSouth, but it also has to consider the cost of fixing a leaky boat.
"I think it would be a disaster for SBC and its shareholders," said Scott Cleland, chief executive of The Precursor Group. "Why would SBC want to tie its mast to the fastest sinking ship in the sea?"
At the same time, the proposed sale of AT&T would likely face sharp criticism from consumer groups and some lawmakers who are concerned about the growing consolidation in the domestic phone industry.
In recent months, Cingular Wireless has acquired AT&T Wireless, Sprint has announced plans to buy Nextel Communications and Alltel said it will take over Western Wireless.
In light of the merger frenzy, regulators could be expected to take a long look at a proposed SBC-AT&T combination, though analysts say the hurdles to such a deal have been lowered in recent years. See full story.
Rapid technological changes involving wireless and the Internet are radically reshaping the phone industry, while new competitors such as the cable TV operators are entering the market.
Given the financial and regulatory hurdles, SBC's pursuit of AT&T could falter, analyst Barry Sine of H.D. Brous and Co. said.
"This is a business very much on decline," he told MarketWatch. "We've heard several rumors regarding AT&T over the past year and nothing has materialized regarding those reports."
Analyst Paul Wright of the mutual-funds company Loomis Sayles said he'd prefer that SBC pass on the chance to acquire AT&T. Such a merger would put SBC in head-to-head competition with BellSouth and could further complicate -- if not impair -- their relationship. The two companies jointly own Cingular.
"I'd rather see them do a deal with BellSouth," Wright said. Analysts say SBC and BellSouth held talks in the past, but disputes over price and concerns about regulatory approval have prevented a deal. Nonetheless, companies increasingly believe they need to serve every part of the communications market -- local phone, long-distance, Internet, wireless and even television service -- to be successful. The pressure to get bigger has spawned a series of mergers.
And none has been a more active acquirer than SBC, which has grown into a giant under the aggressive leadership of Chief Executive Edward Whitacre Jr.
At birth, SBC was the smallest of the seven local "Baby Bells" created by the government's 1984 breakup of the AT&T monopoly. Now the company is the second largest of the four remaining Bells, serving 36 million households in 13 states, including Texas and California.
SBC is also the 60 percent owner of Cingular Wireless. Just three months ago, Cingular completed a massive $41 billion purchase of AT&T Wireless to leapfrog past Verizon as the No. 1 U.S. wireless phone provider.
SBC now has a market value of nearly $80 billion, dwarfing its former parent. A shrunken AT&T is valued at just $15.6 billion, far below its all-time high.
Yet AT&T did generate lots of cash in 2004 -- $3.7 billion in so-called free cash flow -- mostly by jettisoning workers and taking other steps to slash costs.
Some analysts say SBC could pay off the purchase price within a few years by further lowering costs and pocketing the large-if-dwindling amount of cash AT&T produces.
Buy or rent?
By acquiring AT&T, SBC also would gain 3 million business customers, which pay higher rates than consumers.
Another advantage: none of the remaining Baby Bells -- SBC, BellSouth, Verizon and Qwest Communications -- is a big player yet in the corporate-services market. While the Bells have all made inroads in recent years, the purchase of AT&T would immediately catapult SBC into the leading position.
Even that market, however, is fraught with peril. Big corporations, taking advantage of all the competition, have negotiated steep price reductions.
As a result, AT&T's corporate-services unit experienced a 10 percent decline in 2004 sales to $22.6 billion.
Some analysts argue that SBC is better off renting space on other long-distance networks, as it's been doing.
During the high-tech boom of the late 1990s, dozens of companies laid fiber cable to connect the nation's largest markets. Even though the majority have gone out of business, there are still 17 "backbone" long-distance networks in the U.S., Cleland said.
Another alternative is to buy one of those networks -- say Level 3 Communications -- at a much cheaper price. Even with an expensive marketing push, SBC could gain lots of corporate customers at a cost far lower than the proposed purchase price of AT&T, Sine said.
US CREDIT - Traders bet MCI could be the next AT&T
Fri Jan 28, 2005 04:41 PM ET
By Dan Wilchins
NEW YORK, Jan 28 (Reuters) - MCI Inc. (MCIP.O: The cost of protecting AT&T Corp. (T.N: Quote) .
That's a huge move, but if AT&T is acquired, MCI could be next. Both are long-distance companies with shrinking consumer businesses but decent enterprise system operations, which create internal telecom networks for large companies.
AT&T is the market leader in that still-profitable arena, but MCI is a player there, too, and regional bell companies have long been interested in building their enterprise businesses.
"MCI has its issues coming out of bankruptcy -- it needs to cut costs. But it has almost $5.5 billion of cash on its balance sheet, and they would be cheaper to acquire than AT&T," said Phil Melville, head of credit research at US Bancorp Asset Management in Minneapolis.
MCI's market capitalization is about $6 billion, meaning the stock market says the company is not worth much more than the cash on its balance sheet.
That valuation could make MCI attractive for acquirers, and credit investors at this point have much more to gain from MCI moving to investment grade than AT&T.
In the credit derivatives market, five-year protection against AT&T defaulting on its debt traded at around 75 basis points on Friday, or $75,000 a year for every $10 million of principal insured.
That level could fall about another 20 basis points if the company really is acquired by SBC, which has a significantly higher debt rating, a trader said.
Five-year MCI credit protection traded at around 210 basis points on Friday, down from 275 basis points on Wednesday, and could narrow another 160 basis points if it is acquired by a regional bell company with a high credit rating.
Even if the company is not acquired, growing expectations of an acquisition could pull the spread narrower, traders said. At least one trader was long the credit.
There are risks involved with selling protection on MCI. If AT&T is not acquired in the end, both its and MCI's spreads could blow wider. Hedging the MCI trade with a short position in AT&T might ease some of this pain.
MCI is a weaker credit than AT&T, said Peter DeCaprio, high-yield telecom analyst at Evergreen Funds in Boston, which owns neither AT&T or MCI debt.
"You can play this roulette arbitrage game if you want. But there is a world of difference between buying AT&T bonds and buying MCI," DeCaprio said. MCI's network has not been maintained as well as AT&T's, he added.
A spokesman for MCI declined to comment.
Sources familiar with the situation said SBC Communications Inc., the No. 2 U.S. telecommunications company, is in talks to acquire AT&T Corp. for more than $15 billion to bolster its enterprise business.
(Additional reporting by Dean Patterson)
World Media Digest
At&T Shares Rise in Europe
Dana Cimilluca, 01.28.05, 3:10 PM ET
China Daily
Shares of AT&T Corp, the biggest US long-distance phone provider, surged in Europe after the New York Times reported SBC Communications Inc may buy the company for more than US$16 billion, ending 120 years of independence.
AT&T shares rose as much as US$1.43, or 7.8 per cent, to US$19.88 in Germany, while SBC shares fell 57 US cents to US$24.01. SBC spokesman Selim Bingol and Paul Kranhold, spokesman for Bedminster, New Jersey-based AT&T, declined to comment on the New York Times report.
By buying AT&T, SBC Chief Executive Officer Edward Whitacre would obtain business customers such as Lockheed Martin Corp and UAL Corp, helping him boost sales and eliminate the cost of renting long- distance space. AT&T CEO David Dorman last year shrank the business to focus on corporate clients as revenue slid. AT&T shares have tumbled from a high of US$102 in 1999 to US$18.45 on Wednesday.
"The decline for AT&T that started more than a decade ago has continued and accelerated in the last few years," said Paul Budde, who runs market researcher Paul Budde Communication Pty in Australia. "It makes a lot of sense that AT&T get gobbled up before it declines into nothing."
The combination would be the end of independence for AT&T, a 120- year-old phone company that brought phone services to American homes. In his two-year rein, Dorman slashed the workforce by more than a quarter and retreated from consumer service to boost profit.
Dorman had considered selling AT&T to BellSouth Corp in 2003 before talks broke down. In the nine years since the telephone market was deregulated, local carriers such as San Antonio-based SBC and New York-based Verizon Communications Inc have poached more than 35 million residential long-distance customers from AT&T.
A&T shares fell 6.1 per cent last year, 22 per cent in 2003 and 30 per cent in 2002. SBC shares fell 1.2 per cent last year and rose 13 US cents to US$24.58 in New York Stock Exchange Composite trading on Wednesday, valuing the company at US$81.5 billion. AT&T had a market value of US$14.7 billion at Wednesday's close.
San Antonio-based SBC, spun off in the 1984 break up of AT&T, has grown into the second-largest US phone company by sales with more than 50 million local-telephone customers.
Buying the former parent "is a dreadful idea for SBC," said Antony Gifford, a fund manager at Henderson Global Investors in London, which manages US$4 billion in US stocks. SBC should let AT&T "wither on the vine and steal their business," he said.
SBC this week said fourth-quarter profit fell 17 per cent as it recorded costs to fire workers and expand its Cingular Wireless LLC unit. Sales rose 3.1 per cent to US$10.3 billion.
Whitacre would be buying a business that AT&T has been shrinking. Dorman this month reported sales fell 10 per cent in the fourth quarter, the 20th straight month of declines. AT&T had its first rise in net income in five quarters after Dorman sliced costs and started adding business customers.
AT&T is expected to maintain its share among high-end customers this year and will continue to lose business to SBC and the other regional providers among small business clients, Lehman Bros analyst Blake Bath estimated in a research note this month. That will drive down AT&T's share of the overall market for business communications to 23.8 per cent from 24.9 per cent in 2005, he said.
A purchase by SBC would come after the company paid its share of the US$41.3 billion acquisition of AT&T Wireless LLC by Cingular in October. SBC owns 60 per cent of Cingular. BellSouth owns 40 per cent.
(C) 2005 China Daily. via ProQuest Information and Learning Company; All Rights Reserved
Wireless
SBC seeks to buy AT&T
, 01.28.05, 10:30 AM ET
The News and Observer
NEW YORK -- SBC Communications is in talks to acquire AT&T for at least $15 billion, a combination that would create the nation's largest phone company and likely mark the demise of the corporate icon formerly known as Ma Bell, according to published reports.
The talks are considered "fluid" and "very, very sensitive," The New York Times reported Thursday, citing unidentified executives. The Wall Street Journal said executives have met sporadically during the past few weeks and that no final decisions have been made.
Shares of AT&T, which have tumbled from $102 in 1999, gained $1.15 to $19.60. But SBC shares dropped on concern the company would be taking on a business with shrinking revenue and too much debt at a time when SBC is trying to integrate the purchase by Cingular Wireless of AT&T Wireless. Its shares dropped 91 cents to $23.67.
A deal would give SBC -- the San Antonio-based Baby Bell -- a national phone network and business customers such as Lockheed Martin and UAL. It also would mark the end of its 120-year-old former parent, which brought phone services to American homes.
"SBC would be a very good match with AT&T because it's clear this is the direction SBC is going," said Tom Watts, an analyst at SG Cowen. "The bright spots in SBC's results were the data and enterprise businesses."
AT&T's appeal, however, may not materialize into a deal with SBC if the negotiations bog down over how to value a moving target like AT&T's deteriorating business.
Analysts speculated that Verizon Communications and BellSouth might make bids of their own as a defensive measure.
That could boost AT&T's price, though both newspapers indicated SBC was not looking to pay much more than AT&T's current market value.
And even if the talks with SBC are serious, any prospective deal could unravel in a hurry, just as it did a year ago when BellSouth abruptly turned its back on AT&T, fearful that the company was in worse shape than it appeared.
Both AT&T and SBC, the nation's second-largest phone company, declined to comment on the reports. No. 1 Verizon, which reported its quarterly earnings Thursday, and No. 3 BellSouth also declined to comment.
The year ahead should be free of the type of regulatory surprises that pulled the rug out from under AT&T's strategy in 2004, but that company's top executives were noncommittal during their quarterly update last week in discussing when a multiyear tailspin in revenues and customers might end.
"Given that there would be a regulatory lag in the deal process, you have to have a valuation that you feel comfortable will hold itself during that period, and right now I don't feel the likely buyers think that's the case," said Michael Salsbury, a partner at the law firm Chadbourne & Parke who previously worked as general counsel of MCI Communications and then WorldCom.
Still, despite AT&T's declining fortunes, its customer base was so big to begin with that the company probably has enough left to generate cash and profits many years into the future.
AT&T has an enviable roster of major corporate clients who typically commit to lucrative multiyear contracts.
A takeover would enable SBC to add wireless to the bundle of services, generating more business for Cingular Wireless, which it owns in partnership with BellSouth.
But the residential customer base that would come with any takeover is no small matter for SBC and the other Bells, which are investing billions of dollars in consumer businesses ranging from wireless to cable television.
Another likely draw for SBC is geography, a factor which some experts say could provoke a bidding war with Verizon and BellSouth.
Both of those companies' customer bases include heavy concentrations in the eastern United States, particularly the Northeast -- regions where SBC has relatively little presence.
"AT&T's concentration is right up and down the eastern seaboard, right in the heart of its archrival Verizon's territory," said Rich Nespola, chief executive of the industry consulting firm TMNG Inc.
Nespola also noted that SBC is gearing up to compete with Comcast, the nation's biggest cable TV company, which is based in Philadelphia and has major operations in non-SBC territories.
In particular, SBC is spending $5 billion over three years to replace copper cables in its telephone network with speedy fiber-optic cables so it can sell premium interactive TV services in markets with 18 million homes.
from Forbes Online
SBC's New Traditional Pensions
By Selena Maranjian (TMF Selena)
January 28, 2005
Some wonderful things from the past seem to be gone forever. Think of that dangerous "angel hair" (spun glass) that used to festoon Christmas trees, and how kids used to trick-or-treat on their own all over town, without their parents freaking out. But other wonderful things from the past come back. That happened with a major telecommunications company recently when SBC Communications (NYSE: SBC) announced plans to revive a traditional pension plan for a few managers (a mere 55,000, to be more precise). (More than 100,000 union employees already enjoy a traditional pension plan.) OK, perhaps you're more interested in the fact that SBC has reportedly made overtures to buy AT&T (NYSE: T), but trust me, this pension stuff is interesting -- and kind of important. Just a few words on the possible merger, though: If it happens, it will create America's largest telecom company. The price is expected to be north of $15 billion.
Now, let's define pension terms first, shall we? Traditional, old-fashioned pensions are now regarded as "defined benefit" retirement plans. That's because the amount you'd be paid regularly in retirement was specified. You knew what to expect. These plans have given way to "defined contribution" plans, where you sock money into vehicles such as 401(k) plans, and perhaps your employer does, as well. These have grown in popularity for several reasons. Perhaps most importantly, they're easier on employers and shift the risk borne from the company to workers. In defined benefit plans, the employer must make sure to sock away and productively invest enough money to be able to pay what it has promised its workers. With defined contribution plans, employees do get to choose how their money is invested (company stock, index funds, managed funds, money market funds, etc.).
Old-fashioned pension plans have ended up causing many companies many headaches in recent years. In an illuminating article, Robert Brokamp went into some detail on this, citing troubled firms such as Ford (NYSE: F), General Motors (NYSE: GM), Wachovia, 3M (NYSE: MMM), Coca-Cola (NYSE: KO), and IBM (NYSE: IBM).
So what is SBC Communications up to? Well, it offered a rather sensible explanation: It wants to reward long-term employees and encourage its workforce to stay put. It's true that traditional pension plans can be more expensive for companies to provide -- but on the other hand, hiring and training lots of people as workers jump from one company to another is also expensive. SBC's move is also likely to attract more workers, especially with Social Security seeming less and less like it can be relied on. The switch to a traditional pension plan seems like a win-win scenario.
Will other companies follow suit? They well may, which would be a big boon to workers. For now, though, don't count on getting into a traditional pension. Instead, perhaps take advantage of a free sample of our Rule Your Retirement newsletter, and see how it can help you get on track for a comfy retirement.
Learn more about the critical topic of pensions in these articles:
Longtime Fool contributor Selena Maranjian owns shares of Coca-Cola.
from The Motley Fool
