This past week I expressed some skepticism that SBC (NYSE:SBC) would migrate its IP-based network to AT&T (NYSE:T) once the companies merge. At present, SBC depends heavily upon Leucadia's (NYSE:LUK) WilTel subsidiary for its IP networking and some long-distance services.

Today Leucadia filed an 8-K that completely contradicted my beliefs about what SBC might or might not do. Leucadia stated that "SBC had announced that it intends to migrate its IP-based and long distance services to the AT&T network following the acquisition," which it hopes to close by the first half of next year. I'm frankly staggered that, with the low level of capital expenditures that AT&T has put into its voice network in the last two years, this is really the best cost and quality of service option for SBC.

This matters a great deal to Leucadia, since its WilTel acquisition was of nearly "bet the farm" proportions, and SBC comprises as much as two-thirds of WilTel's revenue base. Leucadia stock has dropped more than 20% in a week, a nearly unprecedented level of volatility for what is normally a fairly docile, upward-sloping security.

Is there good news? Some may point to the fact that WilTel would be eligible for up to $200 million in reimbursements for all costs that it incurs should SBC migrate away from its network. Ah, but that's not a penalty, it's "costs incurred." If (theoretically) the cost to WilTel for the migration was $43 million, then that's what it would get. At any rate, $200 million is substantially below what Leucadia paid for WilTel in the first place. And should SBC end its preferred provider relationship with WilTel, this would be an event of default under WilTel's credit agreement, unless creditors waive it.

The problem for Leucadia now becomes the fact that, without those SBC revenues, its biggest subsidiary is likely to start bleeding cash. Leucadia took a run at MCI (NASDAQ:MCIP) last year, so it is possible it may do so again in order to "double down." I don't know what the answer is, but I do know this: A billion dollars-plus of telecommunications revenues are awfully tough to come by these days, much less ones that come as part of a long-term deal.

The folks in charge of Leucadia are awfully smart investors, and they have the track record to prove it. You have to wonder, though, if this time they didn't underestimate the ability of the entire telecommunications business to eat its own young. Believe me, I know, I of the Cable & Wireless (NYSE:CWP)-can't-get-any-cheaper call. I can't help but suspect that there's something else involved in Leucadia's position -- the massive tax loss carryforwards, maybe? It certainly wasn't a surprise, or shouldn't have been, that AT&T was on the market, and the list of suitors was quite short.

Oh, by all means, things can get worse.

Bill Mann owns none of the companies mentioned in this story. MCI was an Inside Value stock selection. For the latest value idea from Philip Durell, please consider a free trial to Inside Value today.