AT&T recently announced that it will acquire fellow phone company BellSouth Corp. in a stock deal worth $67 billion, expanding its reach to 22 states and cementing its position as the largest U.S. telephone company, creating a telecommunications giant that dwarfs its nearest competitor, Verizon Communications.
The new AT&T, which was formed in November when SBC Communications Inc. completed its acquisition of AT&T Corp., also said it would repurchase at least $10 billion of its common shares over the next 22 months.
Together, AT&T and BellSouth would have a national long-distance telephone and data network, residential customers stretching from Florida to California and business customers comprising more than half of the Fortune 1000, analysts have said.
The deal would bring ownership of Cingular Wireless, the No. 1 U.S. wireless telephone company, under one roof, which Wall Street analysts have said would streamline management and allow one parent company to enjoy all of the financial benefits.
The purchase also lets AT&T Chief Executive Officer Ed Whitacre trim $18 billion in costs after a $200 billion spending spree.
In addition, AT&T will take full control of Cingular Wireless, a joint venture owned by AT&T and BellSouth. AT&T already owns 60 percent of Cingular, which is considered the largest cellular phone company in the U.S., providing service to more than 54 million subscribers in the United States.
Combined with BellSouth, the third-largest local phone company in the country, AT&T will pick up another nine states in the Southeast to provide service in a total of 22 states. The combined company would generate about $130 billion in sales and serve nearly 70 million local phone customers.
Getting Bigger:
The Cingular partnership and the company itself are performing extremely well, particularly after the AT&T Wireless acquisition, Whitacre said in a statement. But no partnership between two independent companies, no matter how well run, can match the speed, effectiveness, responsiveness and efficiency of a solely owned company.
The companies have a combined market capitalization of $165 billion and annual revenue of about $64 billion. The next largest telephone company, Verizon Communications, which bought MCI Inc. last year, has a market capitalization of $99 billion and 2005 annual revenues of about $75 billion.
The deal is likely to rattle consumer groups, which opposed the $16 billion merger between SBC and AT&T last year. The fear among these groups is that the telecommunications market is consolidating too much, leaving fewer choices for consumers. But regulators thus far have not bought into this argument.
The main reason for this is that the local phone companies do not compete directly with each other. They operate in different regions of the country. Supporters of the mega-mergers also argue the phone companies are facing stiff competition from cable companies, which are now offering phone service along with television service and high-speed Internet access.
The deal makes sense, said Steven Neimeth, who manages $900 million at AIG SunAmerica Asset Management in Jersey City, New Jersey. He spoke last week in an interview and owns BellSouth and AT&T stock. “By purchasing BellSouth and controlling all of Cingular, it may provide the opportunity to improve margins.”
AT&T will lower costs by dropping the Cingular brand and selling all its services under the AT&T name as it gains 100 percent ownership of the biggest U.S. mobile-phone company. Cingular has 54.1 million wireless subscribers, compared with Verizon Wireless’s 51.3 million. AT&T now owns 60 percent of Cingular, while BellSouth owns the rest.
Biggest Purchase:
The acquisition would be the biggest in the telecommunications industry since Verizon was created in June 2000 with the $71 billion merger of Bell Atlantic Corp. and GTE Corp., according to Bloomberg data. The last deal in any industry that was as large was Sanofi-Synthelabo SA’s purchase of Aventis SA in France for $73 billion in August 2004, the data show.
Verizon and Denver-based Qwest Communications International Inc. are the only other remaining telephone providers from the breakup. Verizon offers service in 28 states including New York and California, as well as Washington D.C.
The combination of AT&T and BellSouth will leave three telephone companies from the eight formed with the split of AT&T in 1984. Whitacre’s AT&T, formerly SBC, was the smallest created in the split. Since then, SBC bought up competitors and in November assumed its former parent.
Lehman Brothers Holdings Inc., Evercore Partners, and Rohatyn Associates advised AT&T on the transaction. Citigroup Inc. and Goldman Sachs Group Inc. advised BellSouth.
BellSouth shareholders 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, that equals $37.09 per BellSouth common share, a 17.9-percent premium.
Shareholders will receive 1.325 AT&T shares for each BellSouth share. The No. 3 U.S. local-telephone company would give AT&T 20 million phone lines, bringing its number of lines to almost 70 million and dwarfing Verizon’s 49 million.
Deal to Face Regulatory Scrutiny:
AT&T executives briefed government officials on the transaction late last week, the Wall Street Journal reported.
A merged AT&T-BellSouth would be trailed by Verizon Communications, which last year bought MCI Inc. Qwest Communications International Inc., the final remaining Baby Bell, covers Minnesota to Washington State.
The spread of wireless services has helped ease the regulatory process for combinations of traditional fixed-line operators. Former Baby Bells have also been rejoining as cable- television providers including Comcast Corp. start offering phone and Internet services.
Any deal would require approval from antitrust authorities as well as the Federal Communications Commission, but analysts said they doubted there would be significant opposition.
The deal is likely to be approved, said Blair Levin, an analyst at Stifel Nicolaus and a former Federal Communications Commission chief of staff. The government has already given us a road map and it had very few speed bumps and much less brick walls for this kind of transaction.
The nature of the competition is changing, said Louis Cimino, analyst at W. H. Reaves & Co., which manages $2 billion including shares of AT&T and BellSouth in Jersey City, New Jersey. He spoke in an interview last week. Agencies will look at that as an argument.
The deal’s price tag will likely weigh on AT&T’s stock price, Stifel Nicolaus analyst Chris King said. Still, he doubts that any AT&T shareholder would be big enough on its own to stop the deal.
AT&T expects the deal will be neutral to earnings per share in 2007, and boost earnings per share, excluding merger costs and other items, thereafter.
Cost-savings are expected to top $2 billion in the second year after closing the deal, and total nearly $18 billion, AT&T said. The savings will come from an undisclosed amount of work force cuts, lower advertising expenses and cheaper operating costs as the companies merge operations to one network.
The merger, which is subject to approval by shareholders of both companies, as well as regulatory authorities, is expected to close within the next 12 months, the company said.