AT&T Merger Talks Could Herald Wider Industry Consolidation, Analysts Say

NEW YORK – Since AT&T Corp. was broken up in 1984, no telecommunications company has offered both nationwide long distance and local service.

Now, that possibilty is re-emerging with word of merger discussions between AT&T's long distance business and local carrier BellSouth Corp. Should such a marriage move forward, it could spark further mergers between long distance and local phone carriers, analysts say.

"This is the beginning of an exciting transformation of the industry," said Jeffrey Kagan, an independent telecom analyst in Atlanta. "The landscape is going to look a lot different in a few years."

Kagan and other analysts said the industry's cash-rich local carriers are in the process of pairing themselves with struggling long-distance companies.

"They're all looking at each other," said Thomas Morabito, a telecom analyst with McDonald Investments in Cleveland. "There's definitely going to be some big time mega-mergers in 2002."

Any deal between AT&T and BellSouth would take place only after AT&T sells its cable business, AT&T Broadband, and involve only its consumer and business telecom divisions, according to sources familiar with the matter.

Such a pact would also face federal regulatory hurdles, but analysts say the economic and regulatory environment has become more sympathetic to consolidation.

AT&T has by no means committed to BellSouth.

People close to the situation said AT&T had also made tentative inquiries about merging or selling its long-distance business with the other three remaining Baby Bells — the local carriers spun off nearly two decades ago — including Verizon Communications Inc., SBC Communications Inc. and Qwest Communications Inc.

Representatives of all five telecommunications companies refused to comment.

Analysts said merger inquiries are not considered unusual in a competitive industry facing an uncertain economy.

"If AT&T is talking to one, they might as well talk to them all," Kagan said. "All it can do is raise the price when other potential merger partners see the value of the deal."

With Baby Bells increasingly overcoming regulatory barriers that bar them from the long-distance market, long-distance carriers such as AT&T, Sprint FON Group and WorldCom Group face dwindling market share, analysts said.

Qwest offers long-distance in 36 states. Verizon now offers it in four states, SBC in three.

BellSouth is working to convince regulators in the nine Southern states it serves to allow it to offer long-distance. Louisiana has already granted permission, and a hearing with regulators in Georgia is scheduled for Tuesday. Once state approval is gained, the company must seek the Federal Communications Commission's blessing.

Analysts see the process snowballing over the next few years, with Baby Bells chipping away first at long-distance market share, then jockeying for the struggling companies themselves.

"It's a chess game now," said Pat Comack, a telecom analyst with Miami-based Guzman & Co. "They're gathering around like sharks. They have their preference on who they want. Who's going to bid first?"

Wireless carriers could also begin taking a share of the landline telephone market, said Don Carros, an analyst with the Meta Group.

Another factor herding the firms together is the improvement in telecommunications infrastructure, which has made distance irrelevant to the cost of an in-country phone call, Kagan said. He predicted that companies will soon offer flat-rate pricing — similar to the "free long-distance" offered by some wireless carriers — and thus eliminate the need for separate sales staffs and offices that handle separate businesses.

"It doesn't cost any more to call across the city or across the country," Kagan said. "You don't need two back offices and call centers."

Within five years or so, Kagan predicted the industry will winnow down to a handful of large carriers that offer both long-distance and local service.

Shares of AT&T were up 60 cents, or 3 percent, to $19.30 in trading on the New York Stock Exchange, while shares of BellSouth were off 40 cents to $41.55. Comcast shares rose 57 cents to

Separately, cable TV provider Comcast Corp. announced Friday that it signed a confidentiality agreement with AT&T, rekindling talks about merging its business with AT&T Broadband.

Talks between the two firms ended in July after AT&T's board rejected Comcast's unsolicited $40 billion stock swap offer. Since then, AT&T has talked with other firms about investing in or buying its broadband business.