Telecom: Bulking Up to Take On Cable

The new AT&T has been on a tear. A year after SBC Communications completed its acquisition of AT&T, the new AT&T (T) that emerged from the $16 billion deal is generating bigger profits and more value for shareholders.

The company's share price closed at $34.69 on Tuesday, down 2 cents for the session, but a respectable 40% above the $25 the stock hit in May. AT&T reported third-quarter results on Oct. 23, beating expectations, and brokerages UBS (UBS) and Banc of America Securities, which have "buy" recommendations on the stock, raised their earnings forecast for the company. Banc of America (BAC) analyst David Barden raised his price target on AT&T to $39. UBS's target is $37.

Who Benefits? The results are similar at BellSouth (BLS), which is being acquired by San Antonio-based AT&T. BellSouth, the dominant telecom provider in nine southeastern states, reported its third-quarter results Oct. 24, also beating investor expectations. Its shares closed at $45.62 on Tuesday, up 3 cents for the day and about 25% higher than in May, when it was trading in the $33 range. Verizon Communications (VZ), which acquired long-distance company MCI, has yet to report its third-quarter results. But its shares are trading at $38, up 18% since May.

Just last year, some industry observers questioned whether telecom consolidation would work to anyone's benefit. Gerald Faulhaber. former chief economist for the Federal Communications Commission and now a professor at the University of Pennsylvania's Wharton School, warned on a Wharton Web site in March that "I think this deal has a great potential to destroy value." A July 2005 story at also raised doubts about the deal (see, 7/20/05, "ATT results shed light on pending deal").

Consumer advocates continue to insist that telecom consolidation will hurt the public. They are trying to discourage the FCC from approving the AT&T-BellSouth deal at a Nov. 3 meeting. "Consumers will still wind up paying inflated prices when these two phone giants merge and dominate local, long distance, wireless, and Internet services," said Gene Kimmelman, senior vice-president for Consumers Union.

Power Balance But none of the fears surrounding telecom consolidation appear to have been realized. The companies are doing better financially; investors are being rewarded. And while consumer groups fret about phone prices, the public is benefiting from an infusion of innovative new technologies, from cheap Internet phone service to high-speed phone lines hauling voice, data, and video.

UBS analyst John Hodulik said in a report that annual, recurring cost savings from the SBC-AT&T deal could exceed $1 billion, and that the expected savings for the year 2007 could exceed the forecast of $1.6 billion to $1.9 billion. AT&T is using that money to invest in Project Lightspeed, its high-speed voice, video, and data service. "AT&T expects to add another $400 million to $600 million in synergies for BellSouth in 2007, generating enough savings to more than offset incremental expenses related to the Lightspeed roll-out," Hodulik said.

The fact is, AT&T and Verizon must invest in new technology. Cable TV operators such as Comcast (CMCSA) and Time Warner (TWX) are selling high-quality digital phone services loaded with features. "It's easier for the cable companies to expand into phone service than it is for the phone companies to expand into TV, so for now the cable companies have the edge," says Richard Siderman, a telecom credit analyst at Standard & Poor's. (S&P, like BusinessWeek, is owned by The McGraw-Hill Companies.)

That balance of power is unlikely to change for the next few years, until the phone companies can gain some traction in the video market. Without national scale and scope, they wouldn't have much chance of competing against the cable companies. But it is through the mergers of the past years that they have now achieved that scale and scope.

Rosenbush is a senior writer for in New York.

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