BELL CEOs SAY NO TO RUMORS OF CONSOLIDATION WITH IXCs

Carriers could hone in on acquisition of regional entities instead

For months industry analysts have speculated that consolidation is coming. Of the various scenarios, the most popular seems to be combinations of Bell companies and inter-exchange carriers, which have networks and customers the Bell companies crave and market caps that make them affordable. In fact, conventional wisdom seems to be that Bell/IXC mergers are inevitable.

Conventional wisdom might not be that smart after all.

Ivan Seidenberg, president and co-CEO of Verizon Communications, and Ed Whitacre, chairman and CEO of SBC Communications, told attendees of a Credit Suisse First Boston investor conference in Orlando last week that neither of their companies is interested in buying a long-distance company — at least not right now.

According to Seidenberg, Verizon doesn't believe the IXCs are worth the baggage they carry.

“We have built fairly sizeable assets to service the North American market, and we feel we have the tools to get a lot of value out of what we've built,” he said. “Therefore, there is very little need at this point to undertake any transaction that would carry execution risks, market uncertainty, regulatory risks and hidden costs that would be enormous.”

Whitacre echoed those sentiments. “My belief is there will be another round of consolidation,” he said during an SBC analyst day last week. “And SBC has never been timid about doing what is right for shareholders on this score. We won't lose our nerve, but we will be as vigilant as ever about anything that would be dilutive.”

The biggest sticking point appears to be the sizeable debt loads the IXCs carry. At the end of fiscal 2001, Sprint had long-term debt of $16.5 billion, WorldCom had $30 billion and AT&T — considered by some to be the most attractive of the IXCs because of its enterprise customer base — had a whopping $40.5 billion (including more than $20 billion in AT&T Broadband debt that will go away when the Comcast deal closes).

“These providers are heavily leveraged, and it would be very difficult for any company to stick their neck out by buying one of them,” said Imran Kahn, analyst for The Yankee Group. “At this point, there isn't any RBOC that will be going after any interexchange carrier in 2002.”

The steep economic downturn has brought the IXCs' financial shortcomings into sharper focus, said Duane Ackerman, chairman and CEO of BellSouth, who also spoke at the CS First Boston conference. Ackerman said a senior government official summarized the situation best: “He told me that it's almost like swimming naked in the ocean. You don't know who's doing so until the tide goes out,” he said. “That's what we're looking at here. The debt levels of a lot of these companies crept up — especially during the good years — and now that the tide has gone out, we can see pretty clearly the impact of that particular situation.”

Patrick Comack, telecom analyst for Guzman & Co., said he believes Whitacre's hands-off position with the IXCs stems more from caginess than fiscal conservatism. “He wants prices to come down. That's what any buyer would say,” Comack said. But he is perplexed as to why Seidenberg is taking the same stance. “Verizon wants customers and global reach, and it's WorldCom and AT&T that have what Verizon wants,” he said.

Verizon is going to need network capacity soon, Comack said. Noting Verizon's relative success in gaining Section 271 approvals to provide in-region long-distance service — currently five states with two applications pending with the FCC — Comack wondered where the carrier will find enough capacity to meet the expected increase in demand should Seidenberg stay true to his word.

“They're going to use Genuity, but I would not assume they're going to consolidate Genuity once they have all their states like everybody thinks, because Genuity is running with a big loss,” Comack said.

Seidenberg also ruled out a horizontal merger with another Bell company. Three years ago when Bell Atlantic and GTE merged to form Verizon, “we believed that doing a horizontal was strategic,” he said. “We needed scale because we never would have convinced the Street to give us the equity to compete with those companies. But it's no longer strategic because of the execution risks and regulatory risks.”

Still, Seidenberg indicated a purchase of a regional wireline carrier wouldn't be out of the question. Their market caps make them even more affordable than the IXCs, they have far less debt — if they have any debt at all — and they would bring fewer regulatory hassles.

It's a good idea, said Dana Tardelli, analyst for Aberdeen Group.

“If you're looking at your market map, you're going to see coverage holes,” he said. “Buying a regional would give them growth in their local business without being organic. And I would imagine there are areas [Verizon looks] at as being unprofitable to be in, where they could pick up the assets to operate for pennies on the dollar.”