BellSouth left without a partner, for now

Although BellSouth lost in the bidding war for long distance firm Sprint, it could be in a good position to take advantage of other deals in the rapidly consolidating industry--but it may need to act fast.

Once again, BellSouth has been left without a dance partner--but it may not be completely left out of the dance party.

BellSouth's own bid to acquire long distance firm Sprint ended when the company agreed to merge with rival MCI WorldCom yesterday, leaving the local phone carrier without a long distance network to complement its local operations.

Like the other Bell companies, BellSouth is still barred by federal law from offering long distance service. Although the company took a 10 percent stake in long distance firm Qwest Communications International, an alliance isn't as good as owning an independent long distance network, analysts say.

That calculation prompted BellSouth's CEO Duane Ackerman to make a deal, and could push the firm to make other bids in the long distance arena. A move by the Baby Bell would only be the latest in a string of multibillion-dollar mergers that have been motivated by increased competition for phone as well as data services in the telecommunications world.

"Clearly they're looking for the long distance play in all of this," said Elliott Hamilton, an analyst at Strategis Group, a telecommunications market research firm. "They've been without a dance partner while everyone else has had three or four."

Yet those dancers in the telecommunications industry may have to call it a night soon. Federal regulators have shown an increasing reluctance to approve big deals, such as those proposed by SBC Communications and Ameritech, or Bell Atlantic and GTE.

But if BellSouth picks the right partner, and can convince regulators the company can help improve phone and Net competition outside its region, it might still be able to get a merger through, industry observers say. But the firm may have to make its move soon.

"I think we're probably a couple of mergers away from the end of the big mergers," said Bob Wilkes, a telecommunications analyst with Brown Brothers Harriman.

Strategic positioning
Although BellSouth was unable to land Sprint's long distance business, the firm may have other options available.

Blessed with a market capitalization of nearly $80 billion, BellSouth has grown steadily over the last few years, and has a solid, revenue-producing residential customer base that puts the balance sheets of some aggressive telecommunications newcomers to shame.

It's even been fairly ambitious in introducing high-speed Internet services, going farther than most of its peers in experimenting with high-speed home Net connections and broadband Web portal technology.

Analysts say BellSouth has avoided making deals with other local phone firms because partnerships wouldn't extend the company's reach beyond local service.

"They want to move toward assets that they don't have, rather than assets they already own," said Rex Mitchell, a telecommunications equity analyst at Banc of America Securities. "It's going to be more important to have a complete bundle of services for the customers you serve than it will be to have a broad reach with a limited product line."

Telecommunications deregulation has set the industry on its head, allowing companies to dabble in previously foreign fields, whether it be cable companies offering local phone service, or local phone companies offering Internet access. Companies like AT&T are now offering bundled packages of service, offering consumer's a one-stop shop for local, long distance, wireless, and Net services.

BellSouth would like to get into this game, yet it lacks a long distance network. Failing in its bid with Sprint, the firm's most likely acquisition target would be the soon-to-be-combined Qwest and US West, analysts say.

"If they thought they could get over the regulatory hurdles with buying Sprint, what's stopping them from making a bid for US West-Qwest?" Strategis' Hamilton said.

Banc of America's Mitchell believes BellSouth will eventually make an acquisition for a long distance network--most likely Qwest-US West--although he also said the company might eye the Cincinnati Bell-IXC Communications combination or an "emerging carrier" such as Level 3 Communications.

"[BellSouth is] still in great shape. The most valuable asset that they wanted [via Sprint] is still available elsewhere," Mitchell said.