AT&T plans phone merger

Free-for-all market sparks $67 billion bid for BellSouth

March 06, 2006|By JAMES S. GRANELLI | JAMES S. GRANELLI,LOS ANGELES TIMES

Telephone giant AT&T Inc. said yesterday that it agreed to buy BellSouth Corp. for $67 billion worth of stock in a deal that would make AT&T the dominant carrier in 22 states, rekindling concerns about building a new Ma Bell monopoly.

The new company, with $130 billion in sales, about 235,000 workers and 70 million local phone customers, would re-create a big chunk of the former AT&T monopoly that was broken up a generation ago.

If the transaction is completed, the seven regional Baby Bell companies created in the government's 1984 breakup of AT&T Corp. would be reduced to three: AT&T (formerly SBC Communications), Verizon (the dominant carrier in Maryland) and Qwest. The latter two might now face renewed pressure to build themselves up.

The proposed marriage of AT&T and BellSouth, the nation's largest and third-largest phone companies, respectively, was driven largely by their joint ownership of Cingular Wireless. That mobile phone company, along with all of BellSouth's businesses, would be renamed and folded into AT&T.

The current AT&T is the former SBC Communications Inc. SBC adopted the name of its former parent company after it acquired the old AT&T in November.

AT&T and BellSouth said their combination, which will require approval by shareholders and the federal government, would create nearly $18 billion in cost savings and result in an unspecified number of layoffs.

The deal brought immediate protest from consumer groups and others who see a reconstitution of the old AT&T monopoly, which ruled the nation's phones until the forced breakup.

"This is a devastating blow to the consumer," said Gene Kimmelman, policy director at Consumers Union, publisher of Consumer Reports magazine. "This one will lead to the end of the era of falling prices for telephone and cellphone service."

Consumers Union and Consumer Federation of America said they would ask the Justice Department to block the acquisition. Kimmelman said that if the deal was approved, regulators should require the sale of Cingular.

The consumer groups also worried that the combination would leave AT&T and Verizon Communications Inc. with the vast majority of local and long-distance customers; a majority of wireless subscribers; and, more important, a hold on high-speed digital subscriber lines that many competitors use to deliver such services as Internet phone calls and broadband television.

The remaining Baby Bell, Qwest Communications International Inc. in Denver, would be dwarfed by the combined AT&T and BellSouth. Qwest serves the sparsely populated Western region.

"Telecommunications has now gone from a regulated monopoly to an unregulated duopoly with just two major players," said the research director of the Consumer Federation of America, Mark Cooper. "Consumers know that is not enough competition to lower their prices and drive innovation."

Despite such concerns, some industry experts see no major hurdles to completing the deal, particularly given that four major telecommunications takeovers in the last 18 months sailed through antitrust reviews with few conditions imposed.

"There will be a lot of people expressing a great deal of concern, but when the Department of Justice and the Federal Communications Commission do their analysis, they will approve the merger with limited conditions," said analyst Blair Levin at Stifel, Nicolaus & Co. Inc. "I don't see how their analysis changes in any way."

Among the prior combinations were Verizon's acquisition of MCI Inc. and SBC's purchase of AT&T Corp., both of which wiped out the major long-distance carriers and chief local phone competitors to the regional Bells.

AT&T Chairman Edward E. Whitacre Jr., 64, would remain as chairman and chief executive of the combined AT&T and BellSouth. "The merger ... will benefit customers through new services and expanded service capabilities," he said yesterday.

BellSouth Chairman F. Duane Ackerman said technological changes that help consumers manage multiple communications services "are shaping a new competitive dynamic and creating tremendous opportunity."

"We're creating a company with much better capabilities to seize these opportunities," said Ackerman, who would serve as BellSouth region president during a transition before leaving.

A combined AT&T-BellSouth would boost efforts to roll out pay TV more quickly and compete with cable TV.

"If you want to be very competitive in pay television, you need a big footprint," said industry consultant Ford Cavallari of Adventis Group.

Responding to yesterday's announcement, Verizon spokesman Eric W. Rabe said: "From our point of view, anything that provides a stronger competitor to cable is welcome. Meanwhile, Verizon's business plan remains unchanged."

The BellSouth acquisition is expected to create savings, starting with $2 billion in 2008 and rising to $3 billion annually by 2010. Most of the savings would come from layoffs and reduced costs at corporate staff levels and in marketing and promotions, particularly at Cingular.

Under the terms of the deal, BellSouth shareholders would receive 1.325 shares of AT&T stock for every BellSouth share. That amounts to $37.09 a share, a total of $67 billion, based on Friday's closing price of $27.99 for AT&T.

AT&T spokesman Larry Solomon said the companies hoped to get Justice and FCC approvals and favorable votes from shareholders to complete the deal within a year.

Analyst Jessica Zufolo of Medley Global Advisors said the prospect that each company would carve into the other's corporate markets also put pressure on them to join forces. "The whole idea is to bring Cingular under one roof and strengthen their hand against further consolidation that is expected in the industry," she said.

James S. Granelli writes for the Los Angeles Times. The New York Times News Service contributed to this article.

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