SBC, BellSouth in Talks to Merge Cell Phone Units

SBC Communications Inc. and BellSouth Corp. are in talks to merge their U.S. cellular phone operations, creating a network that would cover most of the U.S., a person familiar with the discussions said.

A combined company would have 16.5 million customers, mostly in the West, Southwest and Southeast. The units are worth billions of dollars and combined could better compete with AT&T; Corp., Sprint Corp. and a planned venture of Bell Atlantic Corp., GTE Corp. and Vodafone AirTouch, analysts said.

Phone companies are trying to gain wireless customers and trim the charges paid for calls made outside their home regions. Combining the wireless networks of SBC, parent of Pacific Bell, and BellSouth would help reduce such charges. It also could help SBC and BellSouth boost their stock prices, which have declined in the last year.

“I like the idea,” said Bern Fleming, manager of the AXP Utilities Income Fund, which owns 1.6 million BellSouth shares and 1.1 million SBC shares. “It should allow them to offer their customers a better product and a bigger footprint.”

A merger of the companies’ wireless operations could be followed by a sale of shares in the business to the public, said Michael Balhoff, an analyst at Legg Mason Wood Walker Inc. Both companies have been studying ways to boost their stock price.

The combination also could be a precursor to a merger between SBC and BellSouth, said Dan Reingold, an analyst at Credit Suisse First Boston Inc., who has “buy” ratings on both companies.

Neither company would comment on the reports.

Shares of San Antonio-based SBC surged $4.25 to close at $42 on the New York Stock Exchange, and BellSouth gained $2.44 to close at $43, also on the NYSE. SBC has tumbled about 20% in the last year, and BellSouth has fallen about 6%.

“In recent quarters, we’ve seen the national companies continuing to expand their market shares, and the regional players have been contracting,” Balhoff said. “That’s not lost on SBC and BellSouth.”

SBC, which acquired Pacific Bell in 1997, is the largest U.S. local phone company. Atlanta-based BellSouth is fourth-largest, operating in nine Southeastern states.

SBC and BellSouth use the same digital technologies, known as global system for mobile communications and time division multiple access, and their wireless networks do not overlap. SBC also has wireless operations in Connecticut.

Stephen Carter, president and chief executive of SBC Wireless, said earlier in the week that the company has many options for expansion, including partnerships, acquisitions and buying more radio spectrum in government auctions.

In November, SBC Chief Executive Edward Whitacre said the company was considering tracking stocks for its wireless and international businesses. BellSouth Chief Financial Officer Ronald Dykes said a month earlier that his company was considering a tracking stock for its wireless assets because investors undervalue the business.

“Investors are pretty concerned about the fact that BellSouth and SBC have no real national footprint,” Balhoff said.

Wireless companies are racing to form nationwide networks as customers make increasing use of their mobile phones while traveling. Having nationwide coverage is an important step in reducing the cost of serving customers who make calls when outside their home regions.

It can cost a wireless business as much as 30 times more to pay another company to carry its customers’ calls when they “roam” away from home, said Christopher Larsen, an analyst at Prudential Securities Inc.

“It’s a lot more profitable to carry traffic on your own network,” Larsen said. “The [BellSouth and SBC] footprints are very complimentary.”

Bell Atlantic and GTE announced plans in September to combine their U.S. mobile phone operations with those of Vodafone AirTouch to create the largest wireless company in the U.S.

On Tuesday, TeleCorp PCS Inc., the largest affiliate of AT&T;’s wireless network, agreed to buy No. 2 partner Tritel Inc. for $4.38 billion in stock to create a wireless company stretching through the central U.S. TeleCorp and AT&T; agreed to swap some wireless operations to gain licenses.

BellSouth paid $3.5 billion last May for a 10% stake in Qwest Communications International Inc. It later said it was considering buying Qwest or boosting its stake to offer nationwide long-distance service.