Are BellSouth and AT&T Altar-Bound?


Even for the troubled telecom sector, the succession drama at Sprint (FON) seems a bit over the top. In less than a week, the local, long-distance, and wireless carrier lost both its CEO and his handpicked successor, and it offered the top job to someone who may be legally barred from accepting it.

Chairman and CEO Bill Esrey, 63, who has been diagnosed with cancer, is relinquishing the chief executive's job. His longtime friend and confidant, Ron LeMay, also resigned. Sprint says it offered the CEO job to BellSouth Vice-Chairman Gary Foresee, a former Sprint executive and a longtime rival of LeMay. Yet it seems Foresee's current employment contract has a noncompete clause, and BellSouth (BLS) has already gone to court to enforce it.

The drama is driving speculation about Sprint's financial health and potentially leaves it without a seasoned leader in the very near term. Sprint shares fell 9% on Jan. 29, to $11.98. But the to-do has also had a negative impact on BellSouth, which appears likely to lose Foresee regardless of whether he ends up at Sprint.

REVISED RULES. If there's a winner in all this, it could be the somewhat beleaguered AT&T (T). Sprint's interest in Foresee triggered speculation that Sprint may also be interested in merging with BellSouth. Many analysts say Wall Street continues to focus on that possible combination as an expected wave of consolidation in this embattled industry is almost certain to begin in the next few months. But BellSouth may be more interested in buying AT&T, say executives familiar with the matter.

The two companies held serious merger talks more than a year ago, but complications arose that made doing a deal impossible at the time. AT&T was in the midst of selling its cable unit to Comcast (CMCSA), and if it had tried to do two deals at once, BellSouth would have been hit with a tax bill in the billion-dollar range. Now, however, the Comcast deal is closed, and no significant tax burdens prevent anyone from buying AT&T. Plus, BellSouth in December won relief from regulatory restrictions that kept it from providing long-distance phone service or buying a long-distance company, such as AT&T.

BellSouth may be talking up the possibility of such a deal to analysts and the media to gauge reaction. But the fact is the timing for an AT&T-BellSouth deal is improving, and the remaining obstacle to a deal may be fading. The last few months have been marked by uncertainty over the future of regulations that will deeply influence the future profitability of the telecom market, creating winners and losers.

MY CEO, OR YOURS? The rules that force the Bells to share their local lines with rivals at deep discounts, which helps companies like AT&T, will be revised by the Federal Communications Commission later this month. The FCC is expected to rule in the Bells' favor, removing that uncertainty from the market. More important, AT&T may realize that if it's to remain a dominant market force in the industry, it needs to sell itself at a price the cash-strapped Bells can afford.

Under normal circumstances, BellSouth -- as the acquirer -- would get to pick the CEO. But with Foresee leaving BellSouth and unlikely to return, AT&T CEO Dave Dorman would have a clearer shot at running the combined company, making negotiations just that much easier. In the end, once the fundamentals are justified, many of these deals hinge on the huge egos of CEOs who don't want to do mergers that diminish their standing.

This combination would have a certain attraction for BellSouth, but its benefits would be mixed. On one hand, it would give BellSouth the ability to serve large businesses in the Southeast, such as Federal Express (FDX), UPS (UPS), and Coca-Cola (KO). But data services, even to large businesses, aren't a particularly profitable business right now.

HOLDING OUT? BellSouth would also be saddled with AT&T's shrinking consumer business. Telecom analyst John Hodulik of UBS Warburg says the deal makes no sense for BellSouth, because it would actually reduce BellSouth's profit margins. Nonetheless, the business sector could be a lot more appealing as the economy picks up, and AT&T is cheap right now at $20 a share and a market cap of $15 billion. BellSouth's market cap is more than $40 billion.

Indeed, if AT&T is interested in being acquired by BellSouth for strategic reasons, it may be holding out, hoping that its stock price and its revenues will rebound so it can nab a bigger premium. But the longer Ma Bell waits, the risks increase that the overall market could take another hit -- and AT&T could end up selling for even less than it would go for now. Conversations between the two companies that began more than a year ago have never completely ended, executives inside and outside the companies say. Both companies declined to comment.

Where does all this leave Sprint? Between a rock and the butt end of a big old telephone. It could offer its CEO job to an insider, the most likely candidates being wireless chief Len Lauer or local-service chief Mark Fuller. But Lauer just stepped into the wireless job, and he has no obvious candidate to replace him. Fuller has done a good job at the local-phone unit, but it's relatively small. One option: The board could end up swallowing its pride and inviting LeMay back.

WATCH CAREFULLY. In an industry in dire need of consolidation, Sprint isn't at the top of many shopping lists. Of course, consolidation will be necessary in telecom for months to come. As the other Bells -- especially Verizon (VZ) and SBC -- gain long-distance approval and regulatory issues work themselves out, they may look to round out their portfolios.

Maybe by then, Sprint will have its act together. In the meantime, investors would be wise to keep their eyes open as BellSouth and AT&T decide what their next moves are. By Steve Rosenbush in New York and Roger Crockett in Chicago


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