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Before he decided to gobble up AT&T (T
) Corp., Edward E. Whitacre Jr., chief executive of SBC Communications Inc. (SBC
), was hungry for a takeover of another company: BellSouth Corp. (BLS
) And many in the industry figured marrying the two regional Bells made sense. Their customers and phone lines rarely overlap, and a merger would unify ownership of their joint-venture, Cingular Wireless LLC, now the country's largest wireless company. But a deal collapsed when BellSouth's CEO F. Duane Ackerman couldn't come to terms with Whitacre.
Now, what began as a courtship could devolve into something far less friendly. The AT&T deal means SBC will be competing far more aggressively for business accounts deep in BellSouth's territory. If Whitacre is able to lure enough corporate customers away from BellSouth, and package that business with Cingular's wireless service, SBC could gain more sway over the direction of Cingular. And given that Whitacre has already said he wants to own it all, tension with BellSouth is sure to grow. "As soon as SBC buys AT&T, they become BellSouth's No. 1 competitor," says Deutsche Bank telecom analyst Viktor Shvets: "I can't see how friction won't increase incrementally."
For both Bells, the stakes are high. The wireless unit, 60% owned by SBC but with senior management and the board equally divided between its two parents, is the crown jewel of both. Cingular's revenue grew 25.5% last year, to $19.4 billion, while sales of traditional phone services at the two companies were flat. At BellSouth, Cingular is expected to contribute 39.9% of this year's estimated revenues of $33.6 billion, up from 27.6% in 2004. At SBC, meanwhile, wireless will produce 31.5% of estimated sales of $60.7 billion, up 9.4% over last year. "If you ain't in wireless, you ain't in business," says Mark A Winther, telecom analyst at research firm IDC.
BellSouth executives deny any tension with SBC and insist they are committed to the Cingular joint venture. BellSouth also says its 50% control of Cingular's management and board mean it has equal sway over any moves by SBC. Moreover, BellSouth execs argue that the SBC-AT&T merger will help them because 40% of any Cingular revenues coming from the new combination's corporate customers will go straight into BellSouth's pocket.
Still, the SBC-AT&T merger leaves BellSouth more boxed in to its nine-state Southern region, unable to offer business customers a national network comparable to SBC's. BellSouth execs argue they don't need one; for now they're content to rely on hefty margins of 22.5% in one of the fastest-growing regions in the country.
Since announcing the deal on Jan. 31, Whitacre has been careful to downplay any potential for a rift. "I don't think the relationship will be soured," he told analysts in a conference call on Monday. Yet industry experts see a ticking time bomb. The issue will come to a head, they say, in the next few years if SBC begins to poach enough overall revenues from big companies to outweigh BellSouth's share of those sales from Cingular. When that happens, the company may have to rethink its strategy.
One option: BellSouth could extract a huge paycheck from SBC to purchase its share of Cingular, then use the cash to buy the third-largest cellular player, Sprint Corp. (FON
), which is poised to merge with Nextel Communications Inc. (NXTL
) BellSouth says it's not planning a bid, but it has tried to buy Sprint in the past. Whatever happens, SBC and BellSouth's once cozy partnership has changed for good. By Brian Grow in Atlanta