AT&T to Buy BellSouth,
Creating Telecom Giant

KEN BELSON / New York Times 5mar2006

[Wall Street Journal article below]

The AT&T Corporation said this afternoon that it would acquire the BellSouth Corporation for stock it valued at $67 billion, in a merger that would create a telecommunications behemoth serving nearly 70 million local phone customers and controlling all of Cingular Wireless.

AT&T is already the nation's largest phone company, while BellSouth, which operates in a nine-state region in the Southeast, is third behind Verizon Communications. A combined AT&T-BellSouth would have $130 billion in sales and serve residential customers in 22 states.

While consumer groups and AT&T's main rivals are likely to argue that the deal would concentrate too much power in AT&T's hands, federal antitrust regulators have not blocked large deals in recent years. The companies do not compete in the local phone and Internet businesses, and they already jointly own Cingular, the country's biggest cellphone company.

As a result, consumers already buying services from AT&T, BellSouth and Cingular are unlikely to be affected directly. But the purchase would give AT&T more firepower to fight Comcast and other cable television companies that are quickly moving into the phone business.

A union between AT&T and BellSouth had been long rumored because of their mutual stake in the fast-growing wireless industry. In a statement this afternoon, AT&T's chairman and chief executive, Edward E. Whitacre Jr., called the deal "a next logical step" and asserted that the merger "will strengthen Cingular through unified ownership and a single brand."

Mr. Whitacre added, "No partnership between two independent companies, no matter how well run, can match the speed, effectiveness, responsiveness and efficiency of a solely owned company."

Under the terms of the deal, shareholders of BellSouth will receive 1.325 shares of AT&T common stock for each BellSouth common share. Based on AT&T's closing stock price on Friday, this would value the deal at $37.09 for each BellSouth common share. That represents a 17.9 percent premium over BellSouth's closing stock price on Friday.

Mr. Whitacre has not been shy about paying top dollar for rivals to create a giant company that plays a major role in nearly every corner of the telecommunications industry. As chief executive of SBC Communication, he oversaw his company's $16 billion acquisition of AT&T last year and took over its name.

"The empire-building continues," said Jeffrey Halpern, an industry analyst at Sanford Bernstein. "He has a track record of gobbling competitors at premium prices."

In the past decade, SBC under Mr. Whitacre bought three other local phone companies, the Pacific Telesis Group, Southern New England Telecommunications and the Ameritech Corporation.

Cingular bought AT&T Wireless in 2004.

AT&T will keep its name once the deal for BellSouth is completed, and Mr. Whitacre will remain as its chairman and chief executive.

The combined company will dwarf its nearest competitor, Verizon, which is bound to face more pressure to bulk up, too. After SBC made its bid to AT&T last year, Verizon rushed to buy he long-distance carrier MCI Inc. Verizon ultimately beat out Qwest Communications for control of MCI after a protracted fight.

Verizon's next move is likely to try to dissolve its relationship with Vodafone, which owns 45 percent of Verizon Wireless, according to industry analysts. Verizon has expressed interest in buying Vodafone's share, but the price tag is likely to be steep because Verizon Wireless is extremely profitable.

Verizon also might pursue Qwest, which is less likely because the company, the primary local phone provider in the western United States, is saddled with heavy debts, analysts say.

Either way, the remaining Bell telephone companies still must do battle with the cable industry and others moving fast into the phone business. The growing use of e-mail, cellphones and other technology has also eroded AT&T's core business selling local phone lines.

AT&T and Verizon have tried to offset those declines by offering their own new television services. But the construction of the networks to carry their programming is proving expensive to build.

source: http://www.nytimes.com/2006/03/05/business/05cnd-phone.html?_r=1&oref=slogin&pagewanted=print 5mar2006

Who's Who at AT&T, BellSouth

Wall Street Journal 5mar2006

Source: The companies, WSJ

AT&T Unveils Deal to Buy BellSouth
for $67 Billlion

DIONNE SEARCEY, AMY SCHATZ, ALMAR LATOUR and DENNIS BERMAN
Wall Street Journal 5mar2006

AT&T Inc. announced that it has agreed to acquire BellSouth Corp., for stock valued at about $67 billion. The deal would create a telecommunications giant with full control over No. 1 mobile carrier Cingular Wireless.

AT&T says it expects the deal to result in about $2 billion a year in cost savings. AT&T Chairman Edward Whitacre Jr. will serve as the new company's chairman, chief executive and a member of the board of directors of the combined company.

Under the terms of the deal, shareholders of BellSouth will receive 1.325 shares of AT&T common stock for each common share of BellSouth. Based on AT&T's closing stock price on March 3, the companies said, this exchange ratio equals $37.09 per BellSouth common share, or a 17.9% premium over BellSouth's closing stock price, and a total equity consideration currently valued at about $67 billion.

Three members of BellSouth's board of directors will join the AT&T board. The corporate headquarters for the combined company will remain in San Antonio. The headquarters for Cingular Wireless, currently a joint venture of both BellSouth and AT&T, will remain in Atlanta, as will the new combined company's Southeast regional telephone company headquarters. BellSouth's headquarters are currently in Atlanta.

The deal, expected to close within a year, is expected to boost adjusted earnings per share after 2007, the companies said. They also said AT&T expects to buy back $8 billion of its common shares in 2007, in addition to $2 billion in previously announced repurchases planned for 2006.

News of an imminent deal was first reported Saturday night in the online edition of The Wall Street Journal.

Cost Savings Expected

A wave of mergers has dramatically reshaped the telecom industry, and a purchase of BellSouth would further cement the recreation of the old Ma Bell, which the government pushed to break up in 1984.

With an AT&T-BellSouth deal, the nation's telecom services would effectively be cleaved into two behemoths – the new AT&T and Verizon Communications Inc. -- each vertically integrated with a local phone operation, business services, and a wireless unit. The deal would effectively validate the vision of competition laid out by the government, one in which traditional telecom firms compete directly against cable operators rather than against each other. Meanwhile, cable companies have stepped up their efforts to grab market share for phone-services business from telecom companies.

A combination between AT&T and BellSouth could have a market capitalization of more than $150 billion, making AT&T far larger than rival Verizon. The deal would nonetheless set a showdown between AT&T and Verizon, as the two fight to control wireless, the growth portion of the telecom business.

It was the steep growth of Cingular that helped push the two firms together, say telecom bankers familiar with the space. As the importance of the wireless business grew, they say, it became inevitable that SBC Communications Inc., which acquired AT&T Corp. and adopted the AT&T name just months ago, would consolidate its position in the South.

Serial Acquirer

Mr. Whitacre has made a name for himself in the telecommunications industry as a serial acquirer. He headed SBC when it bought AT&T last fall. He boasts a string of acqusitions before that, including Pacific Telesis Corp., Ameritech Corp. and Southern New England Telecommunications Corp.

As Mr. Whitacre nears retirement, the market had been anticipating one last hurrah from him. A BellSouth acquisition by AT&T has long been the subject of speculation from analysts, investors and the two companies' rivals.

Still, the speedy move to acquire BellSouth came as a surprise so soon after Mr. Whitacre's takeover of AT&T. His company is just starting to digest the $16 billion acquisition. The new company dominates nearly every aspect of the industry, from high-speed Internet connections to long-distance phone service, as well as wireless. And Mr. Whitacre now has access to the old AT&T's enterprise business and world-wide network.

Regulatory Hurdles

Although AT&T and Verizon's last mergers (Verizon closed its MCI acquisition earlier this year) passed both FCC and Justice Department review with few major problems, the latest proposed merger may face more hurdles. AT&T and BellSouth executives recently have said they intend to explore new revenue streams from their high-speed Internet services by introducing two-tier or "premium" service for Internet content providers. Concerns about those plans and the concept of "net neutrality," or ensuring that consumers have open access to all Internet sites and services and businesses don't find their content slowed, have become major problems for the Bells in Washington. (See related article)

The management of AT&T, which apparently briefed key senior government officials late last week, appears to be betting that the Bush administration and a Bell-friendly Federal Communications Commission won't raise too many obstacles for such a deal, arguing that the companies serve different geographic regions and do not currently compete with one another in a significant way.

Meanwhile, the FCC that will be reviewing the AT&T/BellSouth deal will likely be a different body soon, with the addition of Robert McDowell, a veteran telecom lawyer who currently serves as assistant general counsel at Comptel, which represents smaller telephone companies and was a vocal opponent of the AT&T and Verizon mergers last year.

Mr. McDowell is scheduled to appear before a Senate committee on Thursday for his confirmation and is likely to be asked about the merger. Although Mr. McDowell is a Republican, his nomination to the FCC was met with noticeable unease by the Bell companies, which have privately expressed some concern that his experience working with smaller competitors may make him less than sympathetic to their concerns.