Analysis: Industry awaits Verizon's response to AT&T/BellSouth deal

Now that AT&T has made public its long anticipated intention to acquire BellSouth, all eyes are on Verizon. How will its rival respond?

Verizon has a history of countering strategic moves by SBC, the RBOC that acquired AT&T last year. Indeed, when SBC announced its intentions to acquire AT&T a year ago, Verizon quickly announced plans to buy AT&T's IXC rival, MCI.

But it goes even farther back than that, according to UBS Warburg Analyst John Hodulik. In 1996, Verizon announced the acquisition of Nynex following SBC’s decision to acquire PacTel. And in 1998, Verizon decided to acquire GTE a few months after SBC announced its intention to purchase Ameritech, Hodulik notes in a bulletin released this week.

So analysts are expecting more of the same now that AT&T is plunking down $67 billion for BellSouth, and are considering several possible scenarios.

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Now that AT&T has made public its long anticipated intention to acquire BellSouth, all eyes are on Verizon. How will its rival respond?

Verizon has a history of countering strategic moves by SBC, the RBOC that acquired AT&T last year. Indeed, when SBC announced its intentions to acquire AT&T a year ago, Verizon quickly announced plans to buy AT&T's IXC rival, MCI.

But it goes even farther back than that, according to UBS Warburg Analyst John Hodulik. In 1996, Verizon announced the acquisition of Nynex following SBC’s decision to acquire PacTel. And in 1998, Verizon decided to acquire GTE a few months after SBC announced its intention to purchase Ameritech, Hodulik notes in a bulletin released this week.

So analysts are expecting more of the same now that AT&T is plunking down $67 billion for BellSouth, and are considering several possible scenarios.

One obvious one is Verizon's publicly stated intentions to acquire Vodafone's 45% stake in Verizon Wireless. The impetus for the AT&T/BellSouth deal was to gain full control over the co-owned Cingular Wireless, a major growth engine for both AT&T and BellSouth.

Verizon, which is currently negotiating with Vodafone for that 45% stake in Verizon Wireless, would gain similar synergies, control and cost efficiencies as AT&T seeks with sole ownership of Cingular, analysts say. But Vodafone may be reluctant to part with it.

" While an acquisition of Vodafone’s stake would make the most sense strategically, it is unclear how amenable Vodafone would be to exiting the U.S. market," Hodulik states in his bulletin.

Another possibility is acquiring Alltel, which is currently spinning off its wireline operation in an effort to focus solely on wireless. Alltel has roughly 11 million wireless customers in 34 states, making it the nation's fifth largest wireless carrier.

But Hodulik notes that Verizon would have to wait until Alltel completed its wireline spin-off in the second quarter before making a move for Alltel. And other analysts say the carrier's stated plans to acquire full control of Verizon Wireless make Alltel and other potential targets unlikely candidates.

"By making the statement that it is seeking to acquire (Vodafone's) stake, Verizon is essentially sending the signal to the market that it is not interested in buying Qwest or Alltel as speculated in the media and by our competitors this morning," states Jeff Halpern, an analyst at Sanford Bernstein. "We think it makes much more sense for the company to acquire the remaining stake in Verizon Wireless rather than pursuing alternative acquisitions, such as Alltel or Qwest."

And what about Qwest? That's option No. 3. Qwest's region in the West could help fill out Verizon's local access footprint. And Qwest did post $13.9 billion in revenue in 2005, which could be an attractive lure, according to Michael Howard, principal analyst at Infonetics.

But Qwest's territory is heavily rural, which makes buildouts more expensive.

"It is much more efficient to reach customers where populations and businesses are densely located," Howard notes.