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Providence Journal

By PETER SVENSSON Associated Press

* The entire telecom industry will feel the effects of the company's $67-billion merger with BellSouth.

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NEW YORK - AT&T Inc.'s deal to buy BellSouth Corp. is a move to strengthen its hand not only against Verizon, the biggest competitor among the remaining Baby Bells, but also cable companies, which last year started gobbling up telephone subscribers in earnest.

The implications of the proposed $67-billion merger stretch to smaller phone companies Qwest and Alltel as well.

At Verizon Communications Inc., some jealous eyes may be looking at the AT&T-BellSouth deal. Before the deal closes, Verizon is the largest telecommunications company in the country by revenue, if not by number of customers. After the deal, it will trail AT&T by both measures.

Also, AT&T is doing something Verizon has long said it would love to do: take complete control of its wireless joint venture. In buying BellSouth, AT&T would get BellSouth's share of Cingular Wireless. Verizon wants to buy out its partner in Verizon Wireless, Vodafone Group PLC of Britain.

John Hodulik, analyst at UBS, noted that "Verizon has typically followed up on strategic moves at SBC," AT&T's predecessor. In a statement, Verizon chief executive officer Ivan Seidenberg said the company's strategy is not affected by the AT&T-BellSouth merger, and it doesn't have any particular "holes" in its business that it's looking to fill.

Vodafone's U.S. stock jumped 7 percent Monday morning after the AT&T-BellSouth deal was announced, but has since lost most of those gains, perhaps as investors have realized that the AT&T-BellSouth merger doesn't have a profound impact on Vodafone's relationship to Verizon.

Gaining full control of Verizon Wireless would allow Verizon to stop forwarding 45 percent of the venture's profit to Vodafone and position the entire company more strongly as a growth business, less reliant on its slowly shrinking landline phone business.

But AT&T has stronger reasons to want Cingular, and they don't apply in Verizon's case. Cingular is run as a separate company, with joint control by both partners, with a separate brand. After a merger, AT&T will do away with the Cingular brand and save on marketing by using the AT&T name throughout. Also, it can eliminate redundant corporate and support functions.

Verizon, on the other hand, already uses the Verizon brand for its wireless service and has operational control of the joint venture.

Verizon's other option would be to look at Qwest Communications International Inc., the last remaining regional Bell company.

"It's gone," said Susan Kalla, analyst at Caris & Co. "It's just a matter of time till it gets taken out."

But a Qwest acquisition would make more sense for AT&T than Verizon, Kalla says, because it would provide landline service areas that are contiguous to AT&T's territory.

Absent an acquisition, Denver-based Qwest stands to lose from the AT&T-BellSouth merger, because Qwest carries long-haul traffic for BellSouth. That traffic would move to AT&T's network after an acquisition.

Kalla noted that the long-haul business has very slight margins, but Citigroup analyst Michael Rollins warned in a research note Tuesday that the loss of the traffic may mean that Qwest will miss its earnings estimates. He also says the highly indebted Qwest is an unlikely acquisition, primarily because its stock is overvalued.

Qwest shares fell 46 cents, or 6.7 percent, to close Tuesday at $6.38 on the New York Stock Exchange, after rising 3.8 percent Monday.

The other telephone company that could be in play is Alltel Corp., based in Little Rock, Ark.

UBS's Hodulik says Alltel would be the natural candidate for Verizon, since it has a substantial wireless operation and is spinning off its mostly rural wireline business this year. Kalla says it could be interesting to AT&T as well.

Alltel shares jumped 3.6 percent Monday, and mostly kept that gain Tuesday, falling only 5 cents to close at $66.56.

Among the cable companies, which are wrapped in a two-front war with telephone companies, the merger is likely viewed with trepidation.

The cable companies have started selling telephone service, while the phone companions are edging into selling TV over their phone lines or newly drawn fiber-optic lines.

"We believe Bell-cable competition will unfold like the Vietnam War, with many battles stretching over a long period of time. It will be a war of attrition, where the player with the greatest cash flow to fund its arsenal wins," Caris analyst Kalla wrote in a research report.

AT&T already has a larger market capitalization than the entire cable industry, according to the National Cable and Telecommunications Association, and it will extend that lead by buying BellSouth.

Shares of the largest cable company, Comcast Corp., are down about 2.6 percent since the AT&T-BellSouth deal was announced.

In broadband, cable companies still have the most subscribers, but phone companies added more subscribers last year by radically slashing prices on their main product, DSL.

Cable companies had about 2.3 million telephone customers at the end of last year, and that number has grown quickly.

"As far as technological innovation they are ahead of the Bells," Kalla said. "Whether they can leverage the technology to put them on an even position with the Bells -- it's possible but not probable."

"Many, many companies have failed, competing with or selling to the Bells," Kalla added.

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* With its acquisition of BellSouth, AT&T becomes the largest telecommunications company in the country. Its corporate offices are in San Antonio, Texas.

AP PHOTO / TOBY JORRIN