Opening up the markets in US telecoms

Danielle Robinson in New York looks at the M&A activity in the wake of recent deregulation in the US

Wall Street is gearing up for a burst of multi-billion dollar mergers and acquisitions and underwriting business arising from President Bill Clinton's signing of a wide-sweeping telecommunications law last week.

The new legislation unleashes a competitive free-for-all in the country's telephone, cable and media industries by allowing long-distance carriers, local phone companies and cable television operators into each other's markets.

The law also lifts a ban on cross-ownership between cable and phone companies in small communities and frees media companies to buy more television and radio stations.

The ramifications are not confined to America's borders. "In each country, there may be historically one phone company. In the next five to 10 years most countries will have at least two, if not two to five companies," says Mark Maybell, co-head of the telecomm- unications, media and technology investment banking group at Merrill Lynch.

The UK is already heading down the same track. Last week's announcement of United News and Media's pounds 3bn merger with MAI was in anticipation of further deregulation in its industry, as in the US where the prospect of new communications law last year led to a spate of media M&A announcements, including Walt Disney's $19bn merger with Capital Cities/ABC; Time Warner's purchase of Turner Broadcasting System and Westinghouse Electric Corp's $5.4bn acquisition of CBS Inc.

Indeed, within hours of the telecom bill becoming law, the Federal Communications Commission last week cleared the Walt Disney merger deal with Capital Cities to create the world's biggest media group. Now the FCC is considering abolishing rules that bar media companies from owning newspapers and broadcast stations in the same markets.

Mergers between media groups are just beginning. Media conglomerates such as News Corporation as well as software companies like Microsoft are forging alliances with telecommunication groups to ensure they are among what will end up being a handful of communications monoliths controlling both product and distribution networks in the future.

Mr Maybell said: "What you are seeing people striving for in the US and what you can expect to see occurring around the world are moves to develop nationwide brand names that sell all of these products - local and long- distance telephone, cellular and video capacity in the one package."

The idea is that big brand-name companies like AT&T will eventually provide households' local and long-distance telephone services, cellular phones, cable, Internet connections and personal computer services with all the additional news, business, education and entertainment paraphernalia that goes with it.

The basic aim of future M&A in the industry is to control the transmission of three basic telecommunication products - voice, data and video. The distribution networks include the simple twisted copper-pair wire networks of phone companies, wireless transmission like cellular and satellite, and coaxial and fibre-optic cable. Phone companies' wire networks are the slowest transmitters and will not cut it in the future, which is why some of the biggest telephone operators in the US are aligning themselves with big cable operators. Also, cable can provide an instant local telephone network for long-distance telephone providers. Sprint, the third-biggest US long-distance telephone provider, is the first to get all of the pieces of the puzzle. It has developed a link-up with three large cable operators: Tele-Communications International (TCI), Cox Communications and Comcast Corp.

AT&T is among the most aggressively acquisitive, say bankers. It took over McCaw Cellular a few years ago and has recently taken a strategic investment in the satellite network, Direct TV, which is like the Sky TV of the US. "It's now missing the local phone piece and getting that could manifest itself in a number of ways," said a leading Wall Street M&A expert. "It could end up being a strategic investor with Time Warner television, or be a strategic investor in Continental Cable Vision [based in Boston]. There is also speculation it could look at [local telephone operator] GTE Corp."

Time Warner, TCI and Comcast are also expected to be acquiring companies in the future. Among the US's seven regional "Baby Bell" providers of local telephone services, the most acquisitive include US West, Bell Atlantic and Bell South.

With the passage of the new law, Bell Atlantic and another Bell, Nynex Corp, are negotiating a joint venture to enter the long-distance business and are also discussing the possibility of Bell Atlantic, with a $31.5bn market capitalisation, acquiring Nynex (with a $25bn market cap) in a tax-free stock swap. If the deal happens it would be the biggest takeover in US history, exceeding KKR's $25bn leveraged buy-out of RJR Nabisco.

Potential takeover targets include GTE and, among the Baby Bells, Pacific Telesis Group (PacTel) and Ameritech.

Most interestingly, MCI Communications, the country's second-largest long-distance operator, which has a strategic investment in News Corporation, is also on bankers' list of potential takeover targets.

"MCI will be acquired," said an M&A head in New York. "They have long distance but they don't have a wireless or cable footprint and a Bell phone company could easily acquire MCI and not have any conflict related to doubling up on wireless capacity."

MCI's added value is its connection with News Corporation. "Anyone who acquires MCI are basically getting a foothold into News Corp," said a banker. "This makes MCI even more attractive."

Wall Street bankers are smacking their lips in anticipation of all the fees arising from such business. A typical Wall Street M&A fee schedule on a $10bn deal is about $20m, with fees usually capping out at $30m on larger deals.

Deregulation will also generate billions of dollars in revenue from spin- offs and underwriting of equity offerings and high-yield "junk" bond issues to either pay for M&A deals, restructure balance sheets and/or to raise capital for further expansion.

Merrill Lynch estimated that more than 65 telecommunication companies world-wide are potential issuers of equity deals larger than $250m, totalling as much as $87bn worth of equity raising in the next three years.

AT&T is about to spin off its equipment arm, Lucent Technologies Inc, so it can continue to provide equipment tocompetitors without any conflict of interest. The spin-off involves an estimated $3bn (about 15 per cent) initial public offering of Lucent's capital in March or April. The deal, lead-managed by Goldman Sachs and Morgan Stanley, could produce $100m to $150m in fees for managers and underwriters of the flotation.