BellSouth in Talks to Buy AT&T; Phone Unit

Ailing long-distance giant AT&T; Corp. is in preliminary talks to sell its phone business to BellSouth Corp., a move that could set the stage for the disappearance of one of this country’s most enduring corporations.

Under the plan, AT&T; would first spin off its cable television business, AT&T; Broadband, then merge its consumer and business telecommunications units with BellSouth, according to a source close to AT&T.;

The talks between AT&T; and BellSouth were first reported Thursday by Business Week. The report comes as the telecommunications giant continues negotiations with Comcast Corp. and others to sell off its cable operations, the most valuable of AT&T;’s remaining assets, the source said.

Both AT&T; and BellSouth declined to comment.

AT&T; Chairman C. Michael Armstrong is under intense pressure to boost the company’s sagging stock price, which has plummeted about 50% in two years. AT&T;’s profit also has fallen four consecutive quarters, amid a drop in long-distance rates.

The BellSouth overture--code-named Brazil--was presented to AT&T; board members last week, the source said.

Any such deal probably would face severe regulatory hurdles.

In 1984, AT&T; was ordered to spin off seven regional Baby Bells, including BellSouth, with AT&T; keeping its long-distance business while the Bells handled local phone service.

BellSouth, based in Atlanta, is the nation’s third-largest local phone company behind Verizon Communications and SBC Communications Inc.

AT&T;’s long-distance business, although profitable, is shrinking at a rapid pace. The phone giant’s business communications unit is somewhat better off, but AT&T; faces stiff competition. And Concert, its international telecommunications joint venture with British Telecom, is in disarray.

AT&T; also has held preliminary merger talks with other regional phone carriers, including Verizon Communications, SBC Communications and Qwest Communications International Inc., according to the Wall Street Journal. But a source said AT&T; only briefly considered those companies as potential partners because a deal would trigger intense antitrust scrutiny.

“BellSouth would be easier to merge with than an SBC or a Verizon--but even BellSouth would be extremely difficult,” said Scott Cleland, an analyst at Precursor Group, an independent research firm. “But now [AT&T;] has painted themselves into a corner, and they have few good options at this stage.”

If the two companies forge an agreement, regulators probably would force BellSouth to divest AT&T;’s long-distance business within its nine-state region in the Southeast. Even so, BellSouth effectively would become a national provider of long-distance consumer and business services.

BellSouth has yet to win approval to sell long-distance phone service within its home territories.

“My sense is that they are just floating a trial balloon to see what the market reaction might be” to a deal, said Ajay Mehra, a portfolio manager at Columbia Management Co., whose firm owns more than 2 million AT&T; shares. “It was obviously positive” Thursday.

AT&T; shares rose 91 cents--more than 5%--to close at $18.70. BellSouth fell 60 cents to close at $41.95. Both trade on the New York Stock Exchange.

Meanwhile, sources say the most serious bidder for AT&T;’s cable business continues to be Comcast, which put AT&T; cable unit into play with an unsolicited $40-billion bid that was rejected as insufficient by AT&T;’s board in mid-July.

Since then, Armstrong has been trolling the country for alternative deals, which he presented to the board last week. The options involve investments from Walt Disney Co., Microsoft Corp. and Cox Communications Inc., or cable mergers with AOL Time Warner Inc., Comcast or Cox.

Even sources close to the AT&T; board concede that suitors other than Comcast might be keeping their negotiations alive to extract concessions in related deals from either AT&T; or Comcast.

For instance, Disney executives are said to hate the idea of either AOL or Comcast becoming even more powerful in cable distribution because that could make it harder for Disney to extract rate hikes for its cable channels, such as ESPN and Disney Channel.

Similarly, Microsoft is mainly eager to keep AT&T; out of the hands of rival AOL Time Warner. And Cox has its eye on certain cable subscribers that AT&T; or Comcast might be willing to give up in exchange for its cooperation.

Although AT&T; has failed to begin negotiations with Comcast, the board has instructed Armstrong to proceed.

AT&T; Chief Financial Officer Charles Noski contacted Comcast President Brian Roberts on Monday to discuss the matter, said sources close to the company.

Lawyers from both camps have been pounding out an amended confidentiality agreement that Comcast could sign this week.

Comcast previously refused to sign the agreement because it prevented the cable company from discussing the deal with other suitors. Comcast has wanted to leave its options open should it have to team up with another party to land AT&T; Broadband.

Comcast shares rose 85 cents to close at $35.05 on Nasdaq.

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Times wire services were used in compiling this report.

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And Then There Were Two

Only two of the original seven Baby Bells--BellSouth and Southwestern Bell, now known as SBC--still exist as independent companies since the 1984 breakup of AT&T.;

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Ameritech

Chicago-based regional phone company acquired by SBC in 1999 for $81 billion.

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Bell Atlantic

Philadelphia-based regional phone company acquired another Baby Bell, Nynex, in 1997 for $25.6 billion. Merged with GTE in a $65-billion deal in 2000. Now known as Verizon Communications.

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BellSouth

Atlanta-based regional phone company is the only Baby Bell that has not merged into or been bought by another U.S. phone company.

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Pacific Telesis

San Francisco-based regional phone company acquired by another Baby Bell, SBC Communications, in 1997 for $16 billion.

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Nynex

New York-based regional phone company acquired by Bell Atlantic in 1997 for $25.6 billion.

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Southwestern Bell

Texas-based regional phone company swallowed two other Baby Bells, merging with Pacific Telesis in 1997 in a $16-billion deal and acquiring Chicago-based Ameritech in 1999 for $81 billion. Now known as SBC Communications.

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US West

Denver-based regional phone company acquired by cable operator Qwest Communications in 1999 for $36.5 billion.

Source: Times research