AT&T eyes strategic partnerships

Talks between the two companies recently have broadened, and larger teams of advisers have been brought in on both sides, these people said. The Wall Street Journal reported last month that AT&T's chairman and chief executive, C. Michael Armstrong, and BT's chief executive, Sir Peter Bonfield, had discussed the possibility of a merger.

While the two sides haven't ruled out a complete merger, AT&T (T) will now focus on merging specific operations, such as AT&T's business-services division with BT's business-customer unit.

At a three-day retreat starting Thursday at its headquarters in Basking Ridge, N.J., AT&T's directors will consider a number of other possible deals as it searches for ways to boost its depressed stock price and sluggish revenue growth.

Another combination the board is expected to discuss is a possible merger of AT&T Wireless Corp., the wireless arm of AT&T, with Nextel Communications Inc. (nxtl) A deal could be announced by early next month, said people familiar with the situation. However, talks are fluid and could still fall apart. Nextel and AT&T Wireless are trying to hash out details, such as who will run the combined wireless entity, these people said.

Another option, say people close to the situation, involves forming a consortium with several cable companies that would buy out the consumer long-distance business and then spin it out into a separate, publicly traded entity.

The consumer business at AT&T generates about about $8 billion in annual profit on $23 billion in revenue. But its growth rate is in the single digits and has been dragging down the AT&T's overall rate of growth. As a result, AT&T has been courting buyers for the business for the past several months.

The cable proposal appears to have garnered interest among some at AT&T because it could help the company more rapidly deploy "cable telephony" -- using cable lines for phone calls and gaining a direct pipe into customers' homes and businesses. An alliance with the cable companies could help AT&T compete against the regional Bell phone companies, which already own such direct lines into homes and businesses.

The complex arrangement that is being discussed would essentially place all of AT&T's consumer long-distance assets -- including its customers, employees and billing systems -- into the hands of a separate company that is controlled by the cable companies and AT&T. As part of the deal, the cable companies would be allowed to eventually move AT&T's long-distance customers onto their own cable networks once their cable-TV lines were able to handle phone calls.

While AT&T's customers wouldn't have to move onto a cable company's network, the cable companies would try to entice them by offering attractive bundled packages of services -- such as high-speed Internet connections, local and long-distance phone service and digital television transmissions -- at a discounted price.

For AT&T, the arrangement would allow the company to get money for its consumer long-distance business, get the division off its books and still give it access to some of its 60 million long-distance customers. Because AT&T is the largest operator of cable-TV lines, with 30 percent coverage across the U.S, it eventually wants to move a large percentage of its customers onto cable lines for phone service. It has talked about striking agreements with other cable providers to get AT&T's phone and data services to consumers. AT&T also plans to use "fixed wireless" technology to get its services to some customers who aren't in their cable territories.

Time is critical for AT&T, which is facing fierce competition from the local Bell phone companies as they begin offering long-distance service. SBC Communications Inc. (sbc), which got approval to sell long-distance service in Texas in July, is signing up about 20,000 customers a day, and already has more than 500,000 long-distance customers. The risk for AT&T is that customers will want to get both local and long-distance service from a single carrier and will leave AT&T for a regional Bell when they come calling.

The pressure is forcing AT&T to respond aggressively by offering customers local service. However, AT&T doesn't own traditional phone lines, and must use cable lines to get its local phone offering into customers' homes.

As reported earlier in The Wall Street Journal, AT&T is also considering selling its consumer long-distance business entirely, or combining it with Liberty Media Group, the cable-programming business that trades separately as an AT&T tracking stock, and spinning it off. AT&T management is expected to give presentations and discuss strategy on all these possibilities at the meeting starting Thursday.

To be sure, there are a number of hurdles to any of these potential deals, especially a total merger between AT&T and BT. Both companies have seen their stock prices plunge over the past few months; BT, in fact, is now trading near a two-year low. Shareholders may not support a merger because it would place additional pressure on both stocks.

AT&T declined to comment on any of the possible combinations. BT on Sunday evening issued a statement confirming that it had discussions recently with its partner, AT&T. The talks "include exploring ways of broadening and strengthening the scope of the relationship" between the two companies' business-services segments. Responding to its flagging share price, BT in April launched a strategic review that included the possible spin-off of various operations. More recently, that review has widened to include expanding BT's relationship with AT&T. The outcome of the review will be announced later this year, BT said in the statement.

There are also potentially severe regulatory obstacles to a deal that could dissuade the two companies from forging ahead. Both control vast amounts of trans-Atlantic phone capacity and would probably have to agree to certain disposals for any deal to pass muster.

But both companies are desperate to take some sort of action. They face intense competition in their core businesses, and a merger could give them greater scale with which to compete globally. BT, looking to pump up its stock price, is also considering spinning off certain operations, such as its Internet unit and mobile phone business.

No deal between AT&T and BT is imminent and talks could break down at any time, said people familiar with the situation. Right now the companies are said to be discussing everything from the structure of a deal to the financials.

-- Nikhil Deogun and Steven Lipin in New York contributed to this article. AT&T Corp.'s board is expected to discuss combining some of its businesses with British Telecommunications PLC, as well as a range of other options, at a meeting this week, said people familiar with the discussions.

Talks between the two companies recently have broadened, and larger teams of advisers have been brought in on both sides, these people said. The Wall Street Journal reported last month that AT&T's chairman and chief executive, C. Michael Armstrong, and BT's chief executive, Sir Peter Bonfield, had discussed the possibility of a merger.

While the two sides haven't ruled out a complete merger, AT&T (T) will now focus on merging specific operations, such as AT&T's business-services division with BT's business-customer unit.

At a three-day retreat starting Thursday at its headquarters in Basking Ridge, N.J., AT&T's directors will consider a number of other possible deals as it searches for ways to boost its depressed stock price and sluggish revenue growth.

Another combination the board is expected to discuss is a possible merger of AT&T Wireless Corp., the wireless arm of AT&T, with Nextel Communications Inc. (nxtl) A deal could be announced by early next month, said people familiar with the situation. However, talks are fluid and could still fall apart. Nextel and AT&T Wireless are trying to hash out details, such as who will run the combined wireless entity, these people said.

Another option, say people close to the situation, involves forming a consortium with several cable companies that would buy out the consumer long-distance business and then spin it out into a separate, publicly traded entity.

The consumer business at AT&T generates about about $8 billion in annual profit on $23 billion in revenue. But its growth rate is in the single digits and has been dragging down the AT&T's overall rate of growth. As a result, AT&T has been courting buyers for the business for the past several months.

The cable proposal appears to have garnered interest among some at AT&T because it could help the company more rapidly deploy "cable telephony" -- using cable lines for phone calls and gaining a direct pipe into customers' homes and businesses. An alliance with the cable companies could help AT&T compete against the regional Bell phone companies, which already own such direct lines into homes and businesses.

The complex arrangement that is being discussed would essentially place all of AT&T's consumer long-distance assets -- including its customers, employees and billing systems -- into the hands of a separate company that is controlled by the cable companies and AT&T. As part of the deal, the cable companies would be allowed to eventually move AT&T's long-distance customers onto their own cable networks once their cable-TV lines were able to handle phone calls.

While AT&T's customers wouldn't have to move onto a cable company's network, the cable companies would try to entice them by offering attractive bundled packages of services -- such as high-speed Internet connections, local and long-distance phone service and digital television transmissions -- at a discounted price.

For AT&T, the arrangement would allow the company to get money for its consumer long-distance business, get the division off its books and still give it access to some of its 60 million long-distance customers. Because AT&T is the largest operator of cable-TV lines, with 30 percent coverage across the U.S, it eventually wants to move a large percentage of its customers onto cable lines for phone service. It has talked about striking agreements with other cable providers to get AT&T's phone and data services to consumers. AT&T also plans to use "fixed wireless" technology to get its services to some customers who aren't in their cable territories.

Time is critical for AT&T, which is facing fierce competition from the local Bell phone companies as they begin offering long-distance service. SBC Communications Inc. (sbc), which got approval to sell long-distance service in Texas in July, is signing up about 20,000 customers a day, and already has more than 500,000 long-distance customers. The risk for AT&T is that customers will want to get both local and long-distance service from a single carrier and will leave AT&T for a regional Bell when they come calling.

The pressure is forcing AT&T to respond aggressively by offering customers local service. However, AT&T doesn't own traditional phone lines, and must use cable lines to get its local phone offering into customers' homes.

As reported earlier in The Wall Street Journal, AT&T is also considering selling its consumer long-distance business entirely, or combining it with Liberty Media Group, the cable-programming business that trades separately as an AT&T tracking stock, and spinning it off. AT&T management is expected to give presentations and discuss strategy on all these possibilities at the meeting starting Thursday.

To be sure, there are a number of hurdles to any of these potential deals, especially a total merger between AT&T and BT. Both companies have seen their stock prices plunge over the past few months; BT, in fact, is now trading near a two-year low. Shareholders may not support a merger because it would place additional pressure on both stocks.

AT&T declined to comment on any of the possible combinations. BT on Sunday evening issued a statement confirming that it had discussions recently with its partner, AT&T. The talks "include exploring ways of broadening and strengthening the scope of the relationship" between the two companies' business-services segments. Responding to its flagging share price, BT in April launched a strategic review that included the possible spin-off of various operations. More recently, that review has widened to include expanding BT's relationship with AT&T. The outcome of the review will be announced later this year, BT said in the statement.

There are also potentially severe regulatory obstacles to a deal that could dissuade the two companies from forging ahead. Both control vast amounts of trans-Atlantic phone capacity and would probably have to agree to certain disposals for any deal to pass muster.

But both companies are desperate to take some sort of action. They face intense competition in their core businesses, and a merger could give them greater scale with which to compete globally. BT, looking to pump up its stock price, is also considering spinning off certain operations, such as its Internet unit and mobile phone business.

No deal between AT&T and BT is imminent and talks could break down at any time, said people familiar with the situation. Right now the companies are said to be discussing everything from the structure of a deal to the financials.

-- Nikhil Deogun and Steven Lipin in New York contributed to this article.