For BellSouth, Qwest, Future Looks Different
By Jesse Drucker, Staff Reporter
The Wall Street Journal
Friday, May 6, 2005


(May 6) - After a frenzy of more than $100 billion in mergers that have reordered the nation's telecommunications landscape, two companies -- Qwest Communications International Inc. and BellSouth Corp. -- have largely been left on the sidelines.

Qwest tried hard to wrest MCI Inc. away from Verizon Communications Inc.  But on Monday, Qwest's chief executive, Richard Notebaert, dropped out of the bidding against the much-larger Verizon, after MCI rejected Qwest for the fourth time.

That leaves Denver-based Qwest and BellSouth, the local phone company of the South and part-owner of Cingular Wireless, dwarfed by the giants created by the recent deals, which include SBC Communications Inc.'s January agreement to buy AT&T Corp. for $16 billion.

If their deals are approved, the combined Verizon-MCI and SBC-AT&T will control everything from cellphones to local phone lines to the world's largest Internet and global communications networks.

But analysts and observers say the futures of Qwest and BellSouth couldn't look more different.

"They have a whole different set of circumstances," says Rob Gensler, who runs the Global Stock Fund for T. Rowe Price Associates.  BellSouth, for example, can offer a slew of services to residential and business customers, particularly wireless, that Qwest can't.

Though it held talks with MCI and AT&T, BellSouth decided not to buy a long-distance company.  The Atlanta-based phone company also isn't rolling out multibillion-dollar deployments of fiber-optic cable to make a big push into the TV business, as SBC and Verizon are doing.  Instead, BellSouth, wants to wait to roll out mass television service until the service proves to be profitable, and it points out that it already has enough fiber in the ground to reach roughly one million people.

"Whether we're big or we're little, we'll find ways to grow and ways to create value," BellSouth Chief Executive Duane Ackerman said in a recent interview.  He also says the company isn't worried about competing with the newly enlarged Bells:  "We've been competing with AT&T for 20 years," he says.

Qwest, industry observers say, wanted MCI for a more basic reason: survival.

With no wireless network, Qwest faces declines in its local and long-distance service.  In first-quarter results announced Tuesday, the company reported essentially flat revenue.  Even its small cellular business, through a reselling deal with Sprint Corp., again lost customers, a rarity in the still fast-growing wireless industry.

Qwest was also hoping to use MCI to pare down its high debt load of more than $17 billion, which far exceeds its market capitalization of about $6 billion.  Qwest is the smallest of the four regional "Bell" phone companies, the local phone companies created by the 1984 breakup of Ma Bell.

Qwest still has a few options.  The one it immediately discussed: buy the scattered local and long-distance assets that SBC and Verizon will probably be forced to sell off as a condition for regulatory approval of their deals.  Sprint, which is also buying Nextel Communications Inc., has said it will spin off its local telephone business.

"As these behemoths go through the regulatory processes ... they'll have to divest some customer lists, and I think that's opportunity," Qwest's Mr. Notebaert said in an interview.  He added that Qwest can "absolutely" continue on its own.

If it wants to get bigger, Qwest could acquire smaller long-haul operators like Global Crossing Ltd. and Wiltel Communications LLC, which would give it immediate access to new customers.  It could also go after even smaller local telephone providers like XO Communications Inc. or Time Warner Telecom Inc., which would help it provide complete services directly to businesses.

Qwest officials say the company can keep going with its current set of assets.  In the first quarter, its number of access lines fell just 1% sequentially, and Qwest could hope that double-digit growth continues in its high-speed Internet business.

Indeed, Qwest has led the industry in selling stand-alone Digital Subscriber Line, or DSL, service, not requiring its customers to also pay for local phone service.

Plus, Qwest hopes to take advantage of the uncertainty its rivals will face amid the merger-approval process.  "We know putting together large companies can be distracting," says company spokesman Tyler Gronbach.

Indeed, bigger isn't always better.  BellSouth has often been more profitable than larger peers.  And its shares have performed far better, gaining 2.6%; all the others Bells' shares are down.

BellSouth's only major acquisition, its purchase of AT&T Wireless Services Inc. through Cingular Wireless, a joint venture with SBC, increased its exposure to the still-growing cellular business.

To be sure, BellSouth still faces risks: like other Bells, its core local telephone business is ultimately shrinking.  And even Cingular, of which BellSouth owns 40%, has turned in lackluster performance over the past two years.

BellSouth will face new competition from cable companies, so its comfortable position today may come under much heavier threat.  But when it comes to acquisitions, Mr. Ackerman cautions that expansion at any cost doesn't make sense.

"Any scale that BellSouth would want to acquire would have to lead to growth and profitability," says Mr. Ackerman, its CEO.  "If you look at the scale we have, margins we operate with today, we're doing pretty darn well."

--Almar Latour contributed to this article.