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To: Jim Lurgio who wrote (2796)	7/6/1998 12:26:00 PM
From: Anthony Wong	Read Replies (1) \| Respond to of 11568

New Ventures Make WorldCom, U S West Analysts' Top Picks July 06, 1998 9:13 AM By Chris Kraeuter NEW YORK (Dow Jones)--Analysts are picking bonds from U S West and WorldCom Inc. as the strongest issues amid a large supply of telecommunications paper. Recent moves by both companies to expand into new markets have moved trading spreads wider than their current debt ratings dictate - even though the ventures will eventually make them more competitive, analysts said. Those two companies are not alone, either. Overall, the companies deemed most likely to be long-term winners in the telecom industry are those that are making moves to become global competitors. Both BellSouth Corp. and GTE Corp. were also cited as being able to expand and prosper in the changing environment. Telecom issues are "trading as though they have been downgraded," said Bob Waldman, managing director of global credit research for Salomon Smith Barney Inc. The same day that AT&T and Tele-Communications Inc. announced their merger, U S West came to market with a $3.1 billion mega-issue. Robin Gugick Mayer, first vice president and senior analyst for Prudential Securities Inc., said that issue is doing well because it was priced attractively: the single-A offering priced at triple-B levels. Waldman expects WorldCom to move up in rating to single-A from its current triple-B level. He said he likes the company's strategic position in its industry and strong cash flow growth. The regional Bell operating companies (RBOCs), BellSouth in particular, is being praised by analysts for its efforts to adapt to the move from a monopoly market structure to less regulated competition. Uncertainty About Future Hurts Spreads The wider spreads on GTE are the result of investor uncertainty concerning what the company will look like in the upcoming years, said Tom Aust, global telecommunications analyst for Citicorp Securities Inc. Merger and acquisition talks involving investment-grade telecommunications bonds have created uncertainty about the future of companies in the sector, weakening spreads on their debt. But it is not just merger activity that is increasing risk in the telecom field. Gugick Mayer said she is looking for the ratings agencies to start paying closer attention to cash flow stability of phone companies. By contrast, other parts of the media and telecom industry have reacted positively to the merger and acquisition activity. Michael Healy, vice president at BancAmerica Robertson Stephens, said the cable and entertainment sectors in particular have outperformed comparably rated issues. "One is the business prospects for these companies have been improving and, secondly, several of them have undertaken leverage reduction strategies that haven't been fully factored into credit ratings," he said. Furthermore, better technology is cutting costs which generates more revenues both directly and by allowing price reductions that bring in more customers, analysts said. Pressure to sustain ratings and please shareholders is spotlighting inefficiencies in these companies, as well. Even though growth has slowed for larger companies due to small companies chipping away at market share, the big players are still seeing growth. "When you don't know what's ahead of you, you have to drive a little slower," Aust said. "I see them moving forward, but moving forward at a deliberate pace and trying to hedge their bets as they go." Technology, Data Driving Change Three recent events point to where the industry is headed, Aust said. The SBC Communications purchase of Ameritech Corp. for $62 billion. "What that said was, size is critical." For global success, Aust said, U.S. companies are not big enough yet. He also noted Sprint Communications announcement of a proposed "Integrated On-demand Network" as an "interesting" view of the future." "The AT&T and TCI deal is saying both things," Aust said. "AT&T wants a bigger footprint through expansion into more homes and businesses directly with its wires and to offer an integrated package over that network." The concern for the big telephone companies is in the long term, though. Waldman said the bigger companies are still dependent on circuit switch technology and he looks for acquisitions of the smaller companies as easier leaps to upgrading aging systems. Without the existing capital structures and debt baggage the big players have, start-ups are able to grab chunks of the $200 billion telecom industry by creating "footholds and establish a knowledge base of how to compete locally," Waldman said. Smaller companies also got a jump on the big telephone companies by catering to the information hungry. "The issue is that the data business is growing at an explosive rate and data revenues now make up only a tiny percent of phone companies' revenues," Gugick Mayer said. The merger and acquisition activity into this area, she said, is just the beginning. "In five or six years you are not going to have these monopolies by region." If smaller concerns can continue to provide benefits like that to large telecom companies, acquisitions and mergers will follow. -By Chris Kraeuter; 201 938-2086 -chris.kraeuter@cor.dowjones.com