AT&T, it tolls for thee

Comcast's bid for Broadband puts the rest of telecom giant in play

Comcast's move to acquire AT&T's cable TV business has rendered the remaining pieces of the company candidates for acquisition by a foreign telecom entity-or perhaps even by one of the remaining former regional Bell companies.

"They're going to be taken out," said Patrick Comack, a telecom analyst with Guzman & Co. "They have a group of assets that make them an attractive acquisition target."

The most likely suitors for AT&T's consumer and business units are large foreign telecom companies seeking a U.S. presence. And even though they are dark horses, the former Bell regional holding companies need long-distance assets and covet AT&T's portfolio of top-tier corporate customers.

Sizing up the suitors In millions
	Cash*	Long-term debt*	Can offer long distance	Analysts say...
BellSouth	$712	$13,100	Out of region	Second most likely RBOC to bid
SBC	$551	$16,600	Texas, Oklahoma, Kansas, and out of region	Unlikely to bid until it wins long-distance approval in all states
Verizon	$689	$44,400	New York and Massachusetts	Most likely of RBOCs; furthest along at opening long-distance markets
Qwest	$306	$17,700	Out of region	Least likely RBOC to bid
Cable & Wireless	$6.0	$4.1	Everywhere	Most likely foreign group;  BT/AT&T's                   Concert possible stumbling block
Deutsche Telekom	$14.5	$51.3	Everywhere	Saddled with enormous debt and bad acquisitions
BT	$4.1	$27.9	Everywhere	Possibly most interested, but must    pay down debt first
NTT	$9.3	$33.98	Everywhere	Government ownership problematic
* Based on quarterly reports Source: Company SEC filings

"It's particularly attractive to anyone who wants an immediate large presence in the enterprise space and someone who wants a steady flow of cash," said Bob Lane, senior telecom analyst with The Yankee Group.

AT&T Broadband, the company's cable arm, represents AT&T's largest growth area. Whether Comcast is successful in convincing shareholders to accept its $58 billion bid or another cable-hungry suitor emerges with a better offer, AT&T's outlook is bleak without its Broadband unit to bank on.

AT&T officials did not return calls requesting comment last week.

'They're [AT&T] a $50 billion-revenue company, so I don't know that they will die on the vine. Will they deteriorate rapidly? Yes. They will probably be bought by a foreign telco sometime in the future.' --Scott Cleland, CEO the Precursor Group

Scott Cleland, CEO of the Precursor Group, describes the situation AT&T faces with its consumer and business divisions as the "dead model walking" syndrome.

"They're a $50 billion-revenue company, so I don't know that they will die on the vine," said Cleland. "Will they deteriorate rapidly? Yes. They will probably be bought by a foreign telco sometime in the future."

Which European entity will have the financial muscle and enough regulatory clearance is yet unclear. Deutsche Telekom, BT or Cable & Wireless certainly are large enough to acquire an entity the size of AT&T, though analysts see potential glitches with virtually all possible suitors.

Tim Johnson, principal analyst for Ovum Research, said Cable & Wireless is the only European operation with the cash to buy AT&T.

"It has about $6 billion in cash, and people are saying it needs to make a strategic acquisition of some sort," he said. "It would be jolly interested in AT&T's enterprise business. The problem is AT&T's partnership with BT."

That joint venture, Concert, has not performed the way the two partners had hoped, but its mere existence would cause problems with a C&W/AT&T combination because BT is a direct competitor with C&W. One possible solution would be for AT&T to divest its interest in Concert a l‡ the deal that allowed Vodafone to acquire Mannesmann by divesting Orange, Johnson added.

BT itself could be a potential bidder though it has a large amount of debt.

"[Acquiring AT&T] would be a great thing for BT to do in happier times," Johnson said. "It's heavily in debt, but it's been having quite a lot of success running down that debt these days. If things get better in a year, who knows?"

Other potential European acquirers are laden with debt from the third generation license purchases and the acquisition sprees of the last few years. Most of those acquisitions, he added, have turned out to be dogs. "They ended up being sugar daddies to ill-performing companies overseas."

Johnson said it would be practically impossible for Deutsche Telekom and Spain's Telefonica to acquire AT&T's non-cable assets. Both are already saddled with too much debt, and their shareholders are not looking kindly at overseas investments right now.

The one opening for European players is the lack of regulatory hurdles. Additionally, there is the lure of owning a company that has a history and brand that can't be matched by anyone.

"You're talking about what was once the world's greatest telco," Johnson said. "Somebody ought to be able to do something with it."

Stateside, most analysts don't see any telco that could single-handedly pull a deal off for AT&T in the near term. That's partly because of the legal battles and the current political environment with the debate over long-distance markets and the Tauzin-Dingell bill.

"That's one of the biggest hot potatoes right now, and if one of the Bell companies tried to purchase AT&T it would fall right into [Congress'] lap," said Steve Lancellotta, telecom attorney and partner with Rini, Coran & Lancellotta in Washington, D.C.

However, the lure of owning a company with the assets and customer base of AT&T's business and consumer long-distance units may be too tempting. SBC, for instance, could couple its recently won long-distance freedom in Texas, Kansas and Oklahoma with AT&T's network to form a new powerhouse.

"Clearly it would offer them access to a new market and new customers," said David Burks, analyst with J.J.B Hilliard, W.L. Lyons. "The question becomes can they make those numbers work to justify it."

The fact the AT&T likely will lose its cable arm also could point to a retrenching of telcos in their own turf, giving credence to the former Bell companies--which are filled with former AT&T personnel--being able to handle the operational end of an acquisition. Qwest Communications CEO Joseph Nacchio, for example, had a long executive stint at AT&T.

"Clearly he knows the company, having worked for them," Burks said. "He is such an aggressive entrepreneurial type of CEO that on the surface AT&T doesn't sound like something that would fit where he wants to take that company. It doesn't mean he won't or couldn't."

And any interested RBOCs would not need to wait until they received long-distance approval in their regions to make a play for the AT&T units, Comack said.

"People will say, 'AT&T couldn't get taken over because of [Section] 271,' but the RBOCs can just do a Genuity," Comack said, referring to the FCC's decision that allowed Verizon Communications to spin off Genuity temporarily until Section 271 approvals-which allow RBOCs to provide in-region long-distance service-are obtained throughout its region.

"As soon as they can get long-distance relief, AT&T becomes more attractive to an RBOC," said Lane of The Yankee Group.

Officials for Verizon, BellSouth, SBC and Qwest declined to comment on the record about their company's interest in AT&T's consumer and business assets.

But one RBOC source who requested anonymity said the consensus among the RBOCs is to focus on hitting earnings targets, meeting financial commitments, rolling out DSL and pushing for long-distance approval.

"We're really not in the M&A hunt for anything this year at all, and it would have to be one hell of a fire sale [for us] to go after anyone," the source said. "If anything, we're all looking to shed properties in foreign countries, consolidate and focus in on a couple of key issues."

Such a focus is wise because federal regulators would block such a merger attempt for reasons far more fundamental than Section 271 questions, said Cleland of Precursor.

"An AT&T/RBOC merger is an antitrust no-no," Cleland said. "The government split them up 20 years ago, and putting them back together would recreate the same problem they started with."

Perhaps more important, several analysts said that because long-haul capacity is so cheap, the RBOCs have no financial incentive to attempt such a merger.

"Why buy a long-distance network and pay to maintain it when you can lease capacity for so little?" said another source who requested anonymity.

C. Michael Armstrong

But with no last-mile solution-something AT&T Chairman and CEO C. Michael Armstrong hoped to rectify through its cable buys-AT&T will continue to see its long-distance and DSL margins erode while paying incumbent local exchange carriers for using their networks to reach customers.

Comack noted that AT&T has made several "savvy" investments in buying metropolitan assets for "20¢ on the dollar," but he does not believe the company will have a chance to pursue this strategy long term.

The result is that the AT&T Consumer unit is fading quickly, said F. Drake Johnstone, first vice president at Davenport & Co.

"The RBOCs want to enter the business market, and that's why they might take a look at AT&T Business," Johnstone said. "But given how easy it is for the RBOCs to steal consumer long-distance customers, why would they want to go buy AT&T Consumer when its revenue is declining 16% to 20% a year?"

And the concept that there might not be an AT&T offering long distance in the U.S. is bothersome even to longtime opponents, according to Mitchell Brecher, a shareholder in the law firm of Greenberg Traurig who previously worked for Sprint and the FCC.

"Having faced these guys in court and before the FCC for years, you gain a certain amount of respect for them," Brecher said. "To see [AT&T] struggling is a little unsettling." 
Donny Jackson, Vince Vittore, Kevin Fitchard, Vincent Ryan and Chris Sewell contributed to this article.