Mergers in the telecom industry appear to be contagious. Coming less than a week after AT&T agreed to be bought by SBC Communications...
CHICAGO — Mergers in the telecom industry appear to be contagious.
Coming less than a week after AT&T agreed to be bought by SBC Communications in a $16 billion deal, a reported offer of $6.3 billion for MCI by Qwest Communications International is seen more as a starting point than a done deal.
In response, Verizon Communications and BellSouth yesterday were both said to be looking at whether to make offers for MCI or weigh other moves, including one with Sprint.
For several years, analysts preached that the telecom industry needed consolidation. But most of the sector hunkered down following the dot-com collapse that started in 2000.
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The first move came last year when Cingular Wireless, jointly owned by SBC and BellSouth, bought Redmond-based AT&T Wireless to create the nation’s largest cellphone provider.
Shortly after that deal closed, Sprint said it would buy wireless rival Nextel Communications.
The telecom industry is like someone trying to get olives out of a narrow jar. Once the first olive gets out, the others follow in a rush, said Steven Titch, a Heartland Institute analyst.
“SBC’s move on AT&T is a validation for Qwest and MCI to leak their negotiations,” Titch said.
The companies declined to comment, but analysts questioned whether MCI shareholders would be pleased with Qwest’s offer unless it sets off a bidding war.
MCI has more cash and less debt than Qwest. Any takeover by Qwest would almost certainly require MCI shareholders to accept Qwest stock as payment, said Ben Silverman, editor of FindProfit.com.
“I don’t imagine investors who’ve sunk millions into the reorganized MCI looking for a profit would be happy to take a lot of Qwest paper in return for their investment,” he said.
Like AT&T, MCI has seen profits from its long-distance business shrink dramatically since the Bells began offering the service a few years ago. MCI’s main assets are its Internet backbone and its roster of big business and government agencies as network customers.
Despite years of trying, the Bells have made slow progress cracking the large enterprise market. SBC’s acquisition of AT&T will propel it into first place in that segment.
Analysts say Verizon and BellSouth are assessing whether they need to buy MCI as a counter-measure.
Since emerging from the WorldCom bankruptcy and adopting its former name, MCI has been grooming itself as a takeover candidate. One ploy occurred last year when Leucadia National, a low-profile investment firm, bought about 5 percent of MCI stock and said it might acquire up to 50 percent.
Later in the year, Leucadia sold its holdings at a profit. “Leucadia was a trial balloon for MCI,” said Rich Nespola, chief of TMNG, a tech consultancy.
He said Qwest’s offer has more credibility and is a gutsy play by CEO Richard Notebaert.
But because a Qwest/MCI pairing would lack a wireless component, it would fall short of exploiting MCI’s enterprise-customer base, said Andy Belt, senior vice president with Boston consultancy Adventis.
Selling wireless products to businesses would be the attraction for Verizon or BellSouth to buy MCI, Belt said. Both Verizon and BellSouth have significant stakes in wireless companies.
“An MCI/Qwest hookup doesn’t look like a long-term, stable surviving player,” he said. “It could be an interim step along the road to another deal.”
Whatever happens to MCI, analysts agree telecom consolidation will likely accelerate. Other phone companies such as Sprint may be involved in talks, either as a takeover target or as an acquirer.
Cable-TV operations may also enter the fray.
“The big face-off that’s coming will be between large cable companies and big telecoms,” said Alex Liu, a vice president with consulting firm A.T. Kearney. “Cable companies may partner with a wireless carrier in the short term, but in the longer term, they need to buy a wireless carrier to fully integrate it into their network.”
MCI’s stock closed 47 cents higher at $20.15. Qwest closed at $4.40, up 20 cents.