Credit crunch, economy squeeze phone companies

By Ritsuko Ando - Analysis

NEW YORK (Reuters) - U.S. phone companies, once regarded as resilient to economic crises, are feeling the pinch of this downturn as frozen credit markets stall the mergers and investments they need to grow and compete against cable services.

Phone companies are also more dependent these days on consumer wireless sales and corporate clients, which make them vulnerable to macroeconomic slumps at a time when they are in the midst of massive capital investments in new wireless and video technologies, analysts say.

"The telecom sector is among the most scale-intensive and capital-intensive in the world, and so it will feel the shock far more than most," said Sanford Bernstein analyst Craig Moffett.

Investors used to treat AT&T Inc (T.N), Verizon Communications Inc (VZ.N) and their peers as a safe haven during a recession, like utility companies. But shares of both companies are down around 30 percent from a year earlier, tracking the Nasdaq composite.

Unlike a decade ago, consumers can now disconnect their home phones and go completely wireless or pick alternative services from cable and Internet-based providers. That makes phone companies more susceptible than ever to consumer sentiment.

In addition, AT&T and Verizon are focusing on bolstering sales to corporate customers, which are more likely to respond to a weak economy by cutting their own costs.

"Enterprise spending is at significant risk, particularly the longer a recession goes on. And there's pressure on the consumers. Toss that into the mix with wireless substitution and cable competition, that's not going to make... numbers good for anyone," said Stifel Nicolaus analyst Chris King.

"They're not your grandfather's Bell carriers anymore."

U.S. carriers have been stepping up their investment in high-speed Internet and video to compete with cable companies offering packages of phone, video and Internet services.

AT&T, which has also been acquiring wireless spectrum, had $16.5 billion in debt maturing within a year as of the end of the second quarter. Its second-quarter free cash flow totaled $3.2 billion after $5.3 billion worth of capital spending.

M&A AND REFINANCING

Analysts said weaker economic conditions put smaller players at a disadvantage as they lack efficiencies of scale, pricing power, and the ability to effectively invest in advanced wireless and broadband technologies.

Both AT&T and Verizon have grown over the past few years through a series of mergers, and smaller carriers like Qwest Communications International Inc (Q.N), Embarq Corp (EQ.N), and Citizens Communications Co CZN.N are expected to follow suit eventually.

But with the doors to financing closed shut, few deals are imminent, analysts said.

The Wall Street Journal reported last week that Embarq's plans to put itself up for sale were thwarted by the credit crunch. The company has declined comment on the report.