AT&T-BellSouth Dial Wrong Numbers

While AT&T Corp. (T) and BellSouth Corp. (BLS) are widely held securities among mutual funds and exchange-traded funds, the companies' recent merger agreement has generated only lukewarm enthusiasm.

Todd Rosenbluth, Standard & Poor's telecom analyst, downgraded his recommendation on AT&T to "sell" from "hold", citing that the regulatory approval process will be lengthy given the size of the proposed transaction. He also maintained his "sell" recommendation on BellSouth shares.

The transaction, valued at about $67 billion, will further consolidate the telecommunications industry and result in AT&T acquiring sole ownership of Cingular Wireless, the country's largest wireless voice and data provider with 54.1 million customers. Cingular is currently jointly owned by AT&T (60%) and BellSouth (40%).

"We see benefits for AT&T in owning all of Cingular and leveraging its network in BellSouth territory," Rosenbluth said. "However, BellSouth was trading at an unwarranted premium to our target price, in our view, given the competitive and operational challenges we expect in 2006. In addition, AT&T is still in the early stages of integrating two large acquisitions that we think will pressure its margins."

Howard Silverblatt, senior index analyst at Standard & Poor's, noted that AT&T no longer represents a significant portion of the S&P 500 Index. He said the entire Telecommunications Group accounts for only 3.27% of the S&P 500 -- AT&T and BellSouth, combined, represent just 1.39% of the index. By comparison, in 1977, AT&T was the second largest issue in the S&P 500, comprising 6.52% of the index.

Even with shares of AT&T and BellSouth moving in opposite directions today, two telecom ETFs holding large stakes in AT&T and smaller stakes in BellSouth were higher. iShares DJ US Telecom Sector Index (IYZ) gained 0.80% in late afternoon trading, and iShares S&P Global Telecom Sector Index (IXP) was up 1.30% going into the closing.

The table below shows exchange-traded funds or mutual funds which have at least 5% of their assets invested in either AT&T or BellSouth.

AT&T Corp.

FUND/ETF

Position

As of Date

iShares Dow Jones U.S. Telecom Sector Index (IYZ)

20.7%

1/31/2006

Vanguard Telecommunications Services Index/Admrl (VTCAX)

16.7%

12/30/2005

Fidelity Select Utilities Growth (FSUTX)

12.2%

11/30/2005

Fidelity Select Telecommunications (FSTCX)

11.4%

11/30/2005

iShares S&P Global Telecom Sector Index (IXP)

9.9%

1/31/2006

Hennessy Total Return Fund (HDOGX)

8.6%

12/30/2005

Columbia Utilities Fund/A (CUTLX)

6.4%

12/30/2005

Hennessy Balanced Fund (HBFBX)

6.1%

12/30/2005

GMO Tr US Quality Equity/III (GQETX)

5.4%

12/30/2005

Rydex Srs Tr:Telecommunications Fund/A (RYLTX )

5.1%

12/30/2005

Hillman Focus Advantage Fund (HCMAX)

5.0%

12/30/2005

BellSouth Corp.

FUND/ETF

Position

As of Date:

ProFunds:Telecommunications Ultrasector/Inv (TCPIX)

10.3%

9/30/2005

Fidelity Select Utilities Growth (FSUTX)

9.8%

11/30/2005

Fidelity Advisor Telecomm & Utilities/A (FUGAX)

9.5%

10/31/2005

Fidelity Utilities (FIUIX)

6.5%

10/31/2005

Vanguard Telecommunications Services Index/Admrl (VTCAX)

5.3%

12/30/2005

iShares S&P Global Telecom Sector Index (IXP)

5.1%

1/31/2006

PowerShares Dynamic Telecom & Wireless (PTE) 5.1% 1/31/2006
iShares Dow Jones US Telecom Sector Index (IYZ) 5.1% 1/31/2006

Contact Bob Keane with questions or comments at: bkeane@investmentadvisor.com.

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