How big can Bell Atlantic get?
With more than $100 billion in proposed mergers on its plate if the company completes a deal with AirTouch, Bell Atlantic's ambitions may strain the company's ability to expand.
Bell Atlantic and AirTouch confirmed over the weekend that they are discussing a possible stock merger, valued at close to $45 billion. Any such deal would follow close on the heels of Bell Atlantic's proposed merger, initially estimated to be worth some $53 billion, with GTE.
Analysts say that even though both deals would be stock transactions, thereby having little effect on the company's daily financial operations, the two huge mergers will be a challenging bite for Bell Atlantic to swallow.
"Any time you try to digest even one large merger, you spread your resources thin," said Douglas Christopher, a financial analyst with Crowell Weedon.
According to weekend reports, executives from Bell Atlantic and AirTouch are putting the final touches on a stock swap deal that would bring the wireless company's operations under the Bell Atlantic corporate umbrella.
Analysts said the deal--in the abstract--would make sense for a number of reasons. Bell Atlantic has been struggling to keep pace with AT&T, the current leader in the wireless market, but has been unable to compete with the long distance company's nationwide service plan. Acquiring AirTouch would give the Baby Bell a national footprint and give it the largest wireless subscriber base in the United States.
From a consumer perspective, a merger between AirTouch and Bell Atlantic would likely help drive prices down, and perhaps speed the migration of long distance customers to wireless services.
AT&T's Digital One Rate plan, which treats any call inside the company's nationwide service area as a local call, has proven to be enormously successful with consumers. After a merger with AirTouch, Bell Atlantic would have the national network to create its own competing plan.
The deal also could help boost the Baby Bell's move towards advanced data technologies, by giving the company an infrastructure for nationwide wireless access to its Internet services. AirTouch does not currently offer wireless Net services, however.
Bell Atlantic and AirTouch already jointly operate a PCS (personal communications services) wireless company called PrimeCo Communications, with service areas scattered across the country. The two companies' own cellular operations also conduct joint equipment purchase negotiations and develop technical and service standards together.
AirTouch was spun out of Pacific Bell, another Bell operating company, in 1994, making its assimilation by Bell Atlantic a relatively easily prospect. And finally, analysts say that there would be few regulatory hurdles, such as those that still await the GTE merger, since no cellular company can have a monopoly in any market.
Despite these advantages, some analysts say that Bell Atlantic risks diluting its earnings per share, as the company will have to issue more stock by engaging in two such enormous mergers at the same time.
"There could be significant dilution of earnings in the near term," said Michael Balhoff, a financial analyst with the Legg Mason Precursor Group.
Much of the effect on the company's ability to maintain its earnings growth will depend on the final price of the deals, and on any savings to the company as a result of the transactions, Balhoff added. These savings could come as possible cuts to national advertising expenditures, any overlap in management structures, or simply by stimulating revenue for one or both of the companies.
Balhoff said that the companies would have to find close to $2 billion of this kind of savings or increased revenue by 2001 just to break even on an earnings-per-share basis. "It's going to be a stretch," he said.
Other analysts agreed that integrating the three companies at a time of considerable change in the telecommunications industry, while still keeping earnings strong in the near-term, would be a difficult task.
"They'll have wonderful nationwide coverage, but they'll have to make their capital extremely productive," Christopher said. "They've got a lot of different cultures to deal with."
One analyst downgraded Bell Atlantic's stock today, but said it was part of a broader look at the whole telecom sector.
"The sector has had very strong stock performance, and the stocks are trading near the high end of their historic trading basis," said CIBC Oppenheimer analyst Timothy Horan. The downgrade was a near-term decision, he said, adding that he expected the stocks to outperform the market later in 1999.
Bell Atlantic's stock fell nearly a point to 53.063 in afternoon trading, while AirTouch shares were down more than 2 points to 69.875.