ECONOMIC TROUBLES PLACE CONSOLIDATION ON HOLD

Anticipated Bell/Bell, Bell/IXC mergers not likely in 2002

Though the year began with plenty of speculation to the contrary, current market conditions indicate that consolidation among the Bell companies and the large IXCs won't occur any time soon.

“Given the economy, they've got enough to worry about from an operational perspective without going into a mega-merger,” said Thomas Morabito, analyst for McDonald Investments.

Many of these operational worries have been the subject of even greater attention during recent weeks. The Enron and Global Crossing bankruptcies have brought high debt levels and accounting practices under scrutiny. In addition, Qwest Communications cut its capital expenditure budget an additional $300 million two weeks ago, and BellSouth last week lowered its earnings growth projections for 2002 to 3% to 5%.

Consequently, the focus on Wall Street is on maintaining strong liquidity and a healthy balance sheet. Carriers do not have the resources to meet these demands and negotiate a large merger at the same time.

Low visibility makes valuing companies more difficult, analysts said. “Potential buyers are scratching their heads, wondering what they're buying,” said Bruce J. Roberts, senior telecom analyst for Dresdner Kleinwort Wasserstein.

But if you believe the people who run the companies, mergers among the Bells and major long-distance carriers are inevitable. In early December, for instance, Ivan Seidenberg, president and co-CEO of Verizon Communications, spoke of more consolidation among the Bell companies. More recently, Joe Nacchio, Chairman and CEO of Qwest, said Bell company/IXC mergers are a foregone conclusion.

Current market capitalizations of the probable acquirees — Qwest hovers around $14 billion and Sprint around $12 billion — suggest that now is time to buy, but these companies' heavy debt loads are deterring possible mergers.

“Maybe you have to pay a little bit more for the assets [if you hold off on an acquisition], but it's better than having to deal with market concerns about your balance sheet,” said Doug Colandrea, a bond analyst for Morgan Stanley.

Analysts expect to see some action on this front pick up anywhere from late 2002 to the middle of next year, depending largely on the state of the overall economy.

But the delay of the anticipated carrier consolidation could affect how the mergers shake out. As the Bell companies receive long-distance approval, the buying of IXCs becomes more likely because there appear to be fewer regulatory hurdles.

“Our view is that the acquirees and the acquirers are going to get their own houses in order, and then — hopefully late in the year — we'll see consolidation pick up a bit,” Morabito said.

For the likely buyers such as Verizon and SBC Communications, getting their houses in order consists of trimming costs and conserving cash, Morabito said. Probable sellers such as Qwest and Sprint should trim their debt loads, which stand at $24.9 billion and $25.9 billion, respectively.

BellSouth, Qwest and Verizon declined to comment for this story; Sprint would not respond to requests for comment.