Fri Jul 23, 2004
By Jessica Hall

PHILADELPHIA, July 23 (Reuters) - Falling stock prices and evaporating long-distance telephone operations have made MCI Inc. and AT&T Corp. vulnerable to takeovers, but the timing and value of any deals still remain uncertain, analysts and investment bankers said on Friday.

Relentless price wars and changing government regulations and consumer demands make it risky to predict the trough and value of the long-distance market, analysts said.

"It's like trying to weigh a falling rock," said one telecommunications investment banker. "It's difficult for a buyer or seller to set a value on a business or company that is shrinking daily."

Buyers would have to convince their shareholders that they needed to suffer the near-term pain of buying into a weakening market in order to get the long-term advantage of new, more lucrative corporate customers, networks and products.

Although the timing of mergers may be tough to predict, several industry executives and analysts said it was inevitable that AT&T (T.N: Quote, Profile, Research) and MCI (MCIP.O: Quote, Profile, Research) would get swallowed up by a Baby Bell or a rival long-distance carrier such as Sprint Corp. (FON.N: Quote, Profile, Research)

LAND-RUSH FOR CORPORATE CUSTOMERS

AT&T and MCI dominate the corporate communications market, offering global, high-speed network services and sophisticated products and consulting services. The Baby Bells mostly offer regional services and lack the worldwide reach that multinational corporations demand.

An acquisition "would be a fast way to grab that (corporate) market. It would be impossible for (a Baby Bell) to build a corporate business on their own fast enough to earn a return when rates are falling like they are," said one industry executive who declined to be named.

AT&T on Thursday said it would retreat from the residential telephone market. As its hold on the consumer market loosens, analysts said a merger with a Baby Bell or rival long-distance company would be easier to slip past anti-trust watchdogs.

AT&T's decision "makes it a potentially cleaner long-term takeout candidate," Legg Mason analyst Daniel Zito said. "However, it will likely take some time before AT&T's consumer share shrinks to a palatable level for regulators to approve such a deal."

Meanwhile, investment company Leucadia National Corp. (LUK.N: Quote, Profile, Research) last week said it planned to seek regulatory approval to buy at least half of MCI. That move does not commit Leucadia to any purchase.

"WAKE-UP CALL"

Still, the news of Leucadia's interest spooked other potential suitors into thinking they better make a move soon or miss their chance to buy a long-distance carrier, some investment bankers said.

"Leucadia was a wake-up call that LDs are cheap now. The regulatory environment has moved against them and if you want their corporate customers, grab them now before someone else does," said one telecommunications banker.

Last year, AT&T held unsuccessful merger talks with BellSouth Corp. (BLS.N: Quote, Profile, Research) Meanwhile, Verizon Communications previously weighed an acquisition of MCI -- before the No. 2 U.S. long-distance carrier spiraled into bankruptcy.

Verizon, which has been aggressively targeting small and medium-sized business, could take another look at MCI now that it emerged from bankruptcy with much of its corporate customer-base intact.

Some investment bankers said they expect at least two telecommunications megamergers would be announced before the end of the year. Others had more cautious predictions.

"None of the structural market dynamics in long-distance have changed in the last week. Leucadia doesn't make MCI any more or less attractive than it was before," one banker said.

MCI and Verizon declined to comment. AT&T could not be immediately reached for comment. (Additional reporting by Justin Hyde in Washington)

Mortgage Rates News, Mortgage News, Financial News