ATamp;T, BT consider merger

The two men have privately discussed the idea of a combination during their regular meetings about Concert, the global joint venture between ATamp;T and BT that provides phone and data services to large corporate customers. While this isn8217;t the first time such discussions have taken place 8212; the two companies broached the idea during the creation of Concert last year 8212; the latest conversations are more serious and have focused on specific issues relating to a combination of their businesses, the people say.

But they caution that no deal is imminent, and it is still unclear whether the informal talks will lead to negotiations. What8217;s more, there would be tremendous hurdles to any transaction. Cultural and management issues, which have sunk far smaller deals, would be especially thorny in a cross-border merger of this size.

And, of course, there are regulatory hurdles. While the Concert venture had to clear close scrutiny by antitrust and telecommunications regulators in the US and Europe, both companies control vast amounts of trans-Atlantic phone capacity and probably would have to agree to certain disposals for any deal to pass muster.

In an interview Thursday, Sir Peter said that although ATamp;T and BT quot;work quite wellquot; in their Concert venture, the two companies have quot;had no discussions.quot; However, Sir Peter wouldn8217;t comment on whether there have been overtures from either or both sides. And when asked if he would rule out a merger between ATamp;T and BT, Sir Peter said: quot;I am very open-minded.quot;

Ma Bell8217;s stock has fallen 39 this year, after hitting a 52-week low of 29.63 last week, because of the decline in consumer long-distance prices and ATamp;T8217;s announcement in April that overall revenue growth for the year would be less than previously expected, in part because of shortfalls in the business services unit. BT, meanwhile, faces intense competition in its core phone business in the United Kingdom. Investors also have found it difficult to place a value on BT8217;s highflying operations, such as the wireless unit.

BT shareholders might balk at a potential merger with ATamp;T because it would expose them to the highly competitive U.S. market, as well as to ATamp;T8217;s woes. It has happened before: BT8217;s shareholders were wary of a planned acquisition of MCI Communications Corp. after the US company issued a profit warning. BT8217;s management acquiesced, and MCI was subsequently snatched away by WorldCom Inc.

But for both companies, a combination offers the prospect of efficiencies of scale, new revenue streams and opportunities in the global Internet market.

A merger between ATamp;T and BT, if successful, would create a titan; ATamp;T8217;s stock-market value is now about 105 billion, and BT8217;s is about 80 billion. Joined together, they would be one of the largest fixed-line operators; the world8217;s third-largest wireless company, with 26 million subscribers; and the largest provider of phone and data services to multinational companies.

ATamp;T and BT would be able to wring out huge cost savings by eliminating overlaps in their global networks, call centers and back-office operations, such as billing. ATamp;T would seek to exploit BT8217; large but underleveraged customer base; BT8217;s revenue per customer in its markets is lower than ATamp;T8217;s in the US. BT also has struggled to reap the full benefits from its wireless assets. Its UK mobile-phone unit, Cellnet, was bigger than that of British rival Vodafone AirTouch PLC five years ago, but now Vodafone8217;s subscriber base in the UK surpasses Cellnet8217;s.

For both ATamp;T and BT, the idea of a combination stems in part from the need to solidify their businesses and bolster their shares. BT8217;s management faces eroding profits in the company8217;s domestic business and unproven international investments. While other former phone monopolies in Europe have spun off or plan to spin off highflying businesses such as mobile services or Internet operations, the British phone giant has taken a more cautious approach, to the chagrin of many investors.

ATamp;T has had its own trials. It is faced with the vast task of integrating recently acquired cable-television assets with its domestic network and providing a package of local and long-distance telephone and cable-TV services to millions of Americans. The company also has discovered that many longtime business customers who provide the company8217;s biggest chunk of revenue are starting to desert.

On the downside, a marriage with BT might be seen as a repudiation of Armstrong8217;s bold phone-over-cable strategy. The plan has cost ATamp;T 92 billion in acquisition costs alone, and billions more in upgrade expenditures, which continue. ATamp;T has little to show for its efforts in the way of local phone customers thus far. As of the end of June, ATamp;T had 122,000 local phone customers wired up, a pittance out of the 60 million long-distance customers it currently claims.

Some reckon that if the cable strategy was yielding big results, ATamp;T wouldn8217;t feel compelled to consider another big deal. A deal with BT, said one telecommunications executive, would be one way for ATamp;T to hang on. quot;This is two former big guys trying to stay that way,quot; he said.

ATamp;T8217;s Mr. Armstrong and BT8217;s Sir Peter are very different personalities. Mr. Armstrong is viewed as a forceful and brash executive. Sir Peter has a gentler approach but isn8217;t likely to take a back seat in a merged company.

A combination with BT would help create a gargantuan telecom company with a global reach. But it could potentially make ATamp;T even harder to value on Wall Street. The latter has become a sore point with ATamp;T board member John Malone and other investors, who believe the company is already going in too many directions too quickly. Malone is also one of ATamp;T8217;s largest individual shareholders. Some investors also think the company lacks vision under Armstrong and is resorting to financial gymnastics 8212; announcing one deal after another without solid execution of anything 8212; to pump up the stock price.

Armstrong himself dismissed talk of a BT merger last year, saying publicly that the last thing he wanted to do was to be in the local phone business in the UK. But that, of course, was before ATamp;T8217;s stock price went into a tailspin and confidence in Armstrong8217;s leadership had begun to erode.

In the past year, BT has considered several merger prospects in an effort to gain scale. While it succeeded Thursday in taking control of German telecom operator Viag Interkom, agreeing to pay more than seven billion euros 6.4 billion to double its existing 45 stake, not all of its efforts have borne fruit. Earlier this year, BT walked away from merger negotiations with Spain8217;s Telefonica SA after Juan Villalonga, then chairman of Telefonica, insisted on retaining control of the combined company, people familiar with the situation say.