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AT&T looks to sell its telephone operations

©New York Times

© St. Petersburg Times,
published September 28, 2001

AT&T, the stumbling communications company once known as the mighty Ma Bell, is seeking to sell its telephone operations to one of its Baby Bell offspring.

AT&T has approached at least three of the nation's largest local telephone companies -- Verizon Communications, SBC Communications and BellSouth -- about buying its consumer and business telephone operations, the New York Times reported. The three local phone companies were once part of AT&T, before the government-enforced breakup of the Bell System in 1984. In terms of annual revenue, SBC and Verizon are now both bigger than AT&T's telephone business, which topped $45-billion last year but is expected to decline this year.

Consumers might feel little impact from an AT&T deal, because it would not include AT&T's cable television business, the nation's largest, which AT&T plans to spin off or sell. And residential long-distance service is a business that all the Bell companies are planning to offer anyway -- but only as they win regulators' approval on a state-by-state basis. Acquiring AT&T would do nothing to speed up that regulatory timetable.

Each of the Bells is interested in AT&T primarily for its business customers and its national and international network, the world's largest communications system. Analysts say AT&T's telephone business could fetch $30-billion or more.

For AT&T, the effort to sell its telephone operations, which include the largest consumer long-distance company, is yet another sign of the way a groping business strategy and a protracted long-distance price war have left the company a battered shell of its former self.

In the last two financial quarters, AT&T has lost nearly $2-billion, largely the result of a sharp fall in revenue from long-distance operations and the decline in value of Internet-related investments. The company also is saddled with almost $40-billion of debt.

"AT&T is a rapidly depreciating asset," said Scott Cleland, a financial analyst who is chief executive of Precursor Research in Washington. "AT&T is throwing out lifelines wherever they can."

After spending some $100-billion buying up cable television systems in the late 1990s on a strategy of combining cable, telephone service and Internet access into single household service, the company's chairman, C. Michael Armstrong, reversed course a year ago. Last October, he announced a plan to break AT&T into three companies: a wireless carrier, a cable television company and a telephone company.

The wireless spinoff has been completed. But the cable plan was interrupted in July by an unsolicited $44.5-billion takeover offer for the cable business by Comcast. Comcast is expected to sign a confidentiality agreement with AT&T, the Wall Street Journal reported in its online edition.

Now comes word that instead of making its telephone business a stand-alone operation, AT&T is looking for a rescue by one of the Bell companies.

Officials from AT&T and the Bell companies it has contacted declined to comment on the talks Thursday.

Analysts said it was clear that AT&T was seeking to sell its business and consumer assets to the highest bidder. The New York Times also reported that AT&T held discussions with at least one unnamed overseas communications company.

AT&T's discussions with BellSouth were reported Thursday on Business Week's Web site.

A deal between AT&T and one of the Bell companies would raise regulatory issues, although perhaps not the hard opposition AT&T encountered in 1997 when it discussed a merger with one of the same companies, SBC.

At the time, Reed Hundt, the Clinton administration's chairman of the Federal Communications Commission, said such a combination was "unthinkable."

William Kennard, the Democrat who succeeded Hundt at the FCC, said Thursday, "If this is a step to putting the Bell System back together again, it would reverse more than 20 years of promoting competition."

But the current FCC, under the chairmanship of Michael Powell, a Bush appointee, is seen as much less likely to resist big communications mergers. Powell declined to comment Thursday.

To pass regulatory muster, any of the Bell companies would probably be forced to sell AT&T's long-distance properties in states where they have not yet received federal approval to provide long-distance service.

Verizon, based in New York, has local telephone operations in 31 states and is allowed to offer long-distance calls in Connecticut, Massachusetts, New York and Pennsylvania. SBC, based in San Antonio, has local operations in 13 states and has won long-distance approval in Texas.

BellSouth, which is based in Atlanta and operates local phone companies in nine Southeastern states, has not been allowed to enter the long-distance business. In Florida it operates about 6.4-million lines as one of the state's three main local carriers.

Another concern facing regulators is competition on the local level, where companies other than the Bells have no more than 10 percent of the market, according to the FCC. In fact, AT&T is one of largest competitors with the Bells in this area, making co-ownership of local properties an important issue in any possible deal.

Regulators would be likely to require the resulting entity to sell AT&T's local telephone properties in the region in which it operates. But the companies formed by a merger could put this issue to their advantage by suggesting they would strengthen AT&T's local phone properties in the regions dominated by other Bells, thus increasing competition.

Since the breakup of AT&T that spun off the original seven Baby Bell companies as local telephone providers, the Bells have emerged as the nation's largest and best-financed communications concerns, consolidating into the four current companies.

The fourth is Qwest Communications, based in Denver. It is not known if the company also had been contacted by AT&T.

-- Times staff writer Jeff Harrington contributed to this report.

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