Monday, March 06, 2006

Should we take off the landline?

AT& T in $67 Billion Deal to Buy BellSouth: Purchase Involves Local Lines, Cingular

AT&T Inc. announced plans yesterday to buy BellSouth Corp. for about $67 billion in stock in a deal that would reassemble large swaths of the old "Ma Bell" local-telephone monopoly but is likely to win regulatory approval because of growing competition from mobile phone, cable and Internet telephone companies.

The merger would dramatically expand San Antonio-based AT&T, which is already the largest phone company in the country, by extending its local-phone service into 22 states and giving it full control of Cingular Wireless, the largest mobile phone company in the nation.

The deal, which was announced by the two companies yesterday, would not have any immediate impact on the Washington region, where Verizon Communications Inc. is the dominant local-phone provider, but would be one of the largest telecom mergers in history. The new company would be a behemoth with 317,000 employees, 70.9 million local land lines, 54.1 million cell phone subscribers and 9.9 million broadband Internet users.

Taking control of Cingular, currently run as a joint venture of AT&T and BellSouth, was one of AT&T's main reasons for the deal and would give it free rein to exploit one of the fastest-growing parts of the industry -- the huge demand for wireless services, company officials have said.

The merger illustrates how the U.S. telephone industry has been transformed since the government broke up AT&T in 1984, splitting its long-distance operations from the seven major "Baby Bells" that offered local-phone service across most of the country.

In recent years, the number of local-telephone land lines has steadily shrunk as people have switched to wireless and, albeit in relatively small numbers, have begun to buy phone service from cable companies and voice over Internet protocol (VOIP) providers.

As they see their local-phone business eaten away, the big telecom companies are increasingly vying with cable companies to offer a triple play of services -- combining phone service with cable TV and high-speed Internet access into "bundles" that cost customers less than if they bought each part separately.

By adding mobile phone service, phone companies would be able to offer a "quadruple play."

AT&T chairman and chief executive Edward E. Whitacre Jr., who would become head of the merged company, said he planned to market Cingular under the AT&T name and was confident that the deal would pass muster with federal regulators.

Under the deal, BellSouth shareholders would receive 1.325 shares of AT&T stock for each BellSouth share in a transaction the companies valued at about $67 billion. Based on AT&T's closing stock price Friday, BellSouth shareholders payment would be valued at $37.09, a 17.9 percent premium over BellSouth's closing price Friday.

Analysts said they thought the deal would easily win approval from federal regulators.

Blair Levin, a regulatory analyst with Stifel, Nicolaus & Co., said the merger has to be looked at "in the light of a very different marketplace, with more competition, more substitution and more ways of reaching consumers."

To put it simply, before 1984 AT&T was virtually the only game in town. Now it is not.

Levin also said it was likely to be approved without major conditions by the Justice Department and Federal Communications Commission, noting that both allowed the recent mergers of AT&T Corp. and SBC Communications Inc., which took the AT&T name, and of Verizon Communications Inc. and MCI Inc., which assumed the Verizon name.

"When you look at the road map provided by the government in the prior mergers, there doesn't seem to be anything that looks like a brick wall," Levin said.

AT&T and BellSouth do not compete significantly with each other in local-phone service; BellSouth has largely kept to its nine-state region, which stretches from North Carolina to Louisiana, and AT&T to its 13-state region that runs from Texas up through the Midwest and also includes California and Nevada.

Nor do they compete on mobile phone service given that Cingular, which is 60 percent owned by AT&T and 40 percent by BellSouth, is run as a joint venture.

The one place where they now compete is for medium and large corporations -- also known as "enterprise customers" -- that are large enough to command special lines running to their businesses. In this area, regulators may require that the new company divest itself of some of these lines to try to foster competition, analysts said.

Executives at both companies said they expected to save money by eliminating duplication in their networks, corporate operations and advertising expenses. They declined to estimate how many jobs they would shed as a result, saying they hoped to reduce headcount through attrition but could not rule out layoffs.

The two companies estimated the net present value of synergies at nearly $18 billion and said they expected the merger to close within about a year.

The proposed merger reflects a remarkable transformation for what was once the modestly named Southwestern Bell Corp., one of the original Baby Bell companies that had a region covering Texas, Arkansas, Missouri, Oklahoma and Kansas.

The company has grown via a string of mergers, acquiring Pacific Telesis Group in 1997 for $16.5 billion; Ameritech Corp. in 1999 for $72 billion; and AT&T Corp. the dwindling remainder of Ma Bell, for $16 billion last year.

F. Duane Ackerman, BellSouth's chairman and chief executive, said he and Whitacre had been talking about merging their companies off and on "over the years, but it's only been in the last couple of months that we got . . . to the environment and the kind of specifics that made it work. "

Ackerman rejected the idea that the old AT&T monopoly was being put back together.

"When you think about the collective impact of wireless, of cable and the growing impact of VOIP, that is no longer a minuscule issue to be managed or to be dealt with," he said in an interview. "I hear the cliches that come out about AT&T putting too many land lines back together, but at the end of the day, it is not reducing competition because the competition really is coming from these other forces."

--from the Washington Post archives


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