Verizon: A Leader among Bells?

CEO Seidenberg has assembled the pieces to grow nationwide

Telecom woes are spreading to the industry stalwarts--the Bells. The number of regular phone lines shrank 2% last year as more callers switched to cell phones and to e-mail. New rules also make it cheaper for rivals to lease Bell lines and resell phone service under their own name. Those threats, compounded by a weak economy, led SBC Communications Inc. (SBC ) to announce 11,000 layoffs in late September. BellSouth (BLS ) has lowered its growth targets. The Bells stock prices are down, on average, 20% this year. And Moody's Investors Service warns that the credit rating for the entire sector could be lowered.

So on Oct. 1, when Verizon Communications (VZ ) CEO Ivan G. Seidenberg strode into a Goldman, Sachs & Co. conference in New York's Grand Hyatt Hotel, the crowd was braced for more bad news. But the 55-year-old Seidenberg vowed that, despite the punishing market conditions, the company would meet its financial targets this year, producing operating earnings of $8.4 billion, up from last year's $8.2 billion. Revenue is expected to be flat, at $67 billion. He also dispelled rumors that Verizon would make a bid for a big rival telecom company, assuring analysts that the company wouldn't make a "crazy" acquisition. Verizon's shares soared 20%, to $33--though they are still 43% below the peak reached in 2000.

In the grim world of telecom, that's what passes for a hot stock. The East Coast powerhouse may indeed be poised to emerge from the telecom meltdown as the industry's new leader. During the 1990s, Seidenberg created a giant in local and wireless by merging Nynex with Bell Atlantic and GTE and joining forces with Vodafone Group PLC. (VOD ) Within months, Verizon is expected to win permission to offer long-distance service throughout its local phone territory, eliminating a restriction that has limited the Bells since they were spun off from AT&T (T ) in 1984. "Who will be the leading telecom company in five years? Probably Verizon," says analyst Blair Levin of Legg Mason Inc. The only other Bell of Verizon's scale, SBC, lacks Verizon's base in key financial centers, especially New York.

The challenge facing Seidenberg, who declined to comment for this article, is to survive the telecom industry's worst downturn without dismembering his creation. His buying binge in the 1990s has left him with an industry-leading $64 billion worth of debt. Now, he's slashing capital expenditures and ransacking his portfolio for bits and pieces to sell, all to bring down debt. Analysts say his target for an $8 billion reduction this year is realistic.

And growth? With new competitors nibbling at local business, the old cash cow is starting to dry up. What's more, even as the company invests in new businesses such as wireless and long distance, prices have fallen as much as 20% a year. To boost revenues, Seidenberg plans on transforming Verizon into a leader in the $120 billion market for business communications, taking on AT&T, WorldCom, and the other Bells.

This calls for a turnaround in business services. Verizon's $12 billion unit that provides business voice and data service shrank more than 7% during the first half of 2002. Nevertheless, Seidenberg is betting that by extending the GTE network into business centers, Verizon can nab customers from struggling rivals, principally WorldCom. The goal: to double Verizon's 10% share of the market with just $1 billion in new investment. But competitors say he faces a rough road. "It's no trivial undertaking," says Ronald E. Spears, president of global accounts at AT&T Business Sales.

Seidenberg is offsetting the decline in local revenue by plowing into growth businesses such as wireless, long-distance, and digital-subscriber-line service. The consumer business, which includes local service and newer offerings, is currently growing at 4.5% a year, although the margins are thinner than the old local business.

Still, in an industry marked by shrinkage and bankruptcy, Seidenberg has a growth strategy. If he can pull it off, Verizon could well emerge from this industry crisis as a nationwide giant--and a lonely one at that.

By Steve Rosenbush in New York

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