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Tuesday, March 7, 2006 - Page updated at 12:00 AM

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Huge mergers among phone giants may be near end of line

MarketWatch

WASHINGTON — After a decade of deal-making, the phone industry is running out of buyers and sellers.

The latest deal, AT&T's agreement Sunday to buy BellSouth for $67 billion, would remove one of the few major targets left in the phone business. BellSouth, the dominant local carrier in that region, was arguably the best-managed phone company in the United States.

Its key asset, though, was its 40 percent stake in fast-growing Cingular Wireless, the nation's biggest wireless phone provider. Since AT&T owns the other 60 percent, it made perfect sense those companies were most likely to merge. Industry analysts have been predicting such a move for several years.

If BellSouth is removed from the picture, the most attractive takeover candidate would probably be Sprint Nextel. Other promising targets could include Alltel, T-Mobile or even Qwest.

Stocks for all those companies rose in Monday trading.

Beyond those companies, the pickings are slim. Most major phone companies already have been snapped up, the most recent being the old AT&T, MCI and Nextel Communications.

Some of the potential targets, however, could present regulatory, technological or financial hurdles and may not come to fruition.

Take Sprint. After its summer acquisition of Nextel, Sprint solidified its spot as the nation's third-largest wireless firm, with expected revenue of more than $46 billion in 2006, according to analysts' estimates from Thomson Financial. The Nextel deal reduced the number of national wireless carriers to just four from six a few years ago.

Yet any deal that cuts the number to three would face intense scrutiny. Regulators would be particularly wary of a deal involving Sprint and the No. 1 or No. 2 wireless carriers, AT&T and Verizon Communications.

As it stands now, only Verizon could be considered a possible suitor. AT&T will be busy integrating BellSouth.

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Then there's the technological hurdle. Cingular Wireless, owned by AT&T and BellSouth, runs on a different standard of transmission than Sprint Nextel. Solving the problem could cost a bundle.

Verizon, which recently acquired MCI, is technologically compatible with Sprint, but it has its sights set on acquiring full control of its own wireless business. Vodafone owns a 45 percent stake in Verizon Wireless, the nation's No. 2 mobile operator, and it will cost tens of billions of dollars to buy off the British wireless concern.

"We are focused on integrating MCI, divesting our directories business and working to acquire from Vodafone the remaining 45 percent of Verizon Wireless," the company said in a statement Monday.

If and when that transaction takes place, T-Mobile could become a potential target. The company, owned by Germany's Deutsche Telekom, is the smallest of the four national wireless carriers in the United States.

To its advantage, T-Mobile uses the same GSM wireless standard as Vodafone. As a result, Vodafone could quickly regain a foothold in the key U.S. market if it sold its stake in Verizon Wireless.

In the meantime, it's always possible that Verizon could cast a glance at Alltel, the Arkansas-based wireless carrier that mostly targets rural areas and midsized cities. Alltel actually covers more territory with its wireless network than any other carrier, although there are fewer people living within its coverage area.

Later this spring, Alltel plans to spin off its local telephone business as an independent company — turning itself primarily into a mobile operator.

While its wireless business is expanding rapidly — last summer, it bought Western Wireless — Alltel's traditional phone business has stagnated.

The result of the spinoff, not surprisingly, will make Alltel a more compelling target to Verizon. The companies use the same CDMA wireless transmission standard and have a long-standing roaming or network-sharing deal in place.

Of all the potential targets, Qwest might be the least attractive. The company does not own a wireless business, hasn't made money in several years and still owes more than $14 billion in long-term debt. The Denver-based company also has a more expansive and costly territory to serve: 14 primarily Western states, including Washington, with far-flung populations.

"I can't imagine why anyone would want to buy Qwest," said Nancy Havens, president of Havens Advisors, a hedge fund in New York.

In light of its predicament, Qwest could be an acquirer. Chief Executive Richard Notebaert has consistently said that his company would look to buy discounted assets from big carriers such as AT&T and Verizon when they seek regulatory permission to acquire other phone companies.

As with Verizon's recent acquisition of MCI, Qwest can be expected to lobby regulators to force AT&T and BellSouth to spin off some of their assets to win approval for their deal.

Copyright © 2006 The Seattle Times Company

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