Megamergers end a bad week

The two biggest mergers currently pending in the telecom industry are facing new doubts from Wall Street this week for entirely different reasons.

While a federal judge reviews the antitrust implications of AT&T’s acquisition of BellSouth, Wall Street analysts are growing increasingly concerned that the merger could fail to win regulatory approval.

“We do not view approval as a certainty,” A.G. Edwards wrote in a research note this week while downgrading its rating for BellSouth from hold to sell. “The potential risk of merger opposition and price deterioration no longer are balanced by the potential price appreciation from the successful completion of the merger with AT&T…[BellSouth’s stock price] could drop significantly if the merger were not approved.”

In particular, A.G. Edwards cited as potential threats an intense Internet neutrality debate in the U.S. Senate and “an unexpected focus on the enterprise mergers” in the federal court’s antitrust review.

“If the court probes further and the proceeding drags on, that could prod the [Justice Department] and [Federal Communications Commission] to slow down their decision-making on AT&T/BellSouth, with some lesser chance--if the judge ultimately rejects the [two companies’] prior settlements--they would then demand deeper concessions,” Stifel Nicolaus wrote in a research note this week. “The risk is that the court inquiry could cause the DOJ and FCC to become more cautious and push back their reviews at least until after the November election, and could even lead to tougher conditions if the judge ultimately rejects the settlements.”

Meanwhile, the merger of equipment vendors Alcatel and Lucent Technologies drew increased scrutiny this week after Lucent--already predicting negative revenue growth this year--warned of a June quarter earnings shortfall. In a research note published this week, Credit Suisse analysts called the merger “less than compelling.”

“We believe that the pending Alcatel/Lucent merger is more a defensive play than one driven by strategic logic,” Credit Suisse wrote, adding that the firm may soon lower its rating for both companies to adjust for perceived risks in the execution of the merger.