Bell operating company SBC
As one would expect, both SBC and AT&T shares saw dramatic moves as news of the potential merger bubbled to the surface. Shares of MCI
As is typical in the telecommunications biz, SBC buys a huge amount of bandwidth and services from other telecom companies. One such vendor for SBC is fiber optics provider WilTel, which Leucadia now owns, having bought a controlling stake out of bankruptcy in December 2002 (it took over the remainder the following year.) WilTel is SBC's "preferred provider of domestic voice and data long distance services," and SBC accounts for about two-thirds of WilTel's revenue. Add AT&T into the mix -- a domestic long distance voice and data company -- and suddenly a huge amount of WilTel's revenues -- roughly 65% of its total, or about a billion dollars per year -- is at risk. SBC and WilTel have a long-term contract, but it has plenty of grounds to exit along the way.
The reason this has hit all of Leucadia so severely (and there may, of course, be other reasons, but the timing is certainly persuasive) is that while Leucadia is perceived to be a diverse holding company, a la Berkshire Hathaway
I think that the risk to WilTel is somewhat overstated. Yes, WilTel and AT&T have competing networks, but WilTel's network is fully fiber optic (one of the reasons Leucadia bought it as opposed to the dozens of other distressed carriers), while AT&T has a legacy circuit-switched network and it is painstakingly building a voice-over IP system. Why would SBC go from all-fiber voice and data (with its built-in cost and quality of service advantages) back to a circuit-switched network? In an industry where gee-whiz technology becomes Sanford & Son-grade junk in only a few years, the thought of SBC reversing course from WilTel to AT&T's mish-mashed network doesn't make much sense.
It might do it, of course, and this isn't a black-and-white discussion: WilTel may lose some of its SBC business to AT&T should the merger go through, particularly on the international side. But a nearly 10% drop in Leucadia stock? Wow, that smells like opportunity to me.
Ah, and what about Jefferies
There are worse places to be than holding on to a few million shares of Leucadia. Pretty good timing by Steinberg and Cumming though, no?
Bill Mann owns shares in Berkshire Hathaway. The Motley Fool is investors writing for other investors. For our latest deep value ideas, see what Philip Durell has found in this month's Inside Value newsletter. A free trial issue is yours for the asking.