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Analysis: AT&T-BellSouth deal dials back Ma Bell

Posted by inet - 2006-03-07

COLORADO SPRINGS, Colo. — Nine months after analysts wondered if the AT&T logo would go away, the revamped SBC Communications/AT&T on Sunday (March 5) made a $67 billion stock offer for BellSouth Corp.

If approved, the deal will bring back a significant portion of the national footprint of the pre-divestiture AT&T, at least in the southern portion of the United States.

When SBC recently completed its acquisition of AT&T, the company surprised most market analysts by shifting to the name “AT&T Inc.”, evoking memories of the former AT&T Co. On Sunday, AT&T offered 1.325 shares of AT&T common stock for each share of BellSouth, which equals $37.09 for each BellSouth share.

Analysts and competitors were questioning whether the Justice Department will approve the deal, since the merger will create an AT&T with national scope rivaling the old Ma Bell. While today’s telecommunications markets are vastly larger than the pre-1984 Bell monopoly era, one source pointed out that the eclipsing of circuit-switched voice by Voice-Over-Internet Protocol may have made the rationale for the 1984 AT&T breakup all but obsolete.

“The model for separating interexchange services from local-area services was based on differing profitability of voice calls,” said one former Qwest executive, now consulting for an Internet service provider, who asked not to be identified.

“With the Internet, distance means nothing, and there’s no profit left in TDM voice,” the source said. “There really aren’t any pure-play interexchange companies left any more, except maybe Level 3 and a couple others. What with cable operators and specialty broadband providers entering the Internet market, even if a complete pre-1984 AT&T footprint was cobbled together, AT&T would have nowhere near the monopoly they had in voice days.”

The merger would mean that all Cingular Wireless assets and ownership would now be under one roof, since BellSouth held the minority stock position not held by AT&T.

The other significant area of joint development will come in next-generation fiber to the curb networks for broadband access. AT&T chairman and chief executive Ed Whitacre said in a statement that one factor increasing the attractiveness of BellSouth’s region was “fiber optics deeply deployed in the service area.”

By leveraging the portion of the former Bell Labs that remained with AT&T, AT&T Labs, the two companies will accelerate the use of fiber to aid IPTV rollouts, Whitacre predicted.

AT&T had rolled the SBC Project Lightspeed into a broader residential access program called U-Sphere. BellSouth had offered DSL for Internet access and re-branded DirectTV services for digital television, and was in the initial stages of offering a passive optical network bundled service it called IFITL, for Integrated Fiber In The Loop.

Combining the fiber assets of both companies could speed PON-based broadband access in several regions. The two companies issued a statement Sunday predicting that synergies realized from the merger could reach an annual run rate exceeding $2 billion in the second year after closing of the deal, which is anticipated within 12 months.

Some of these synergies would be realized in the form of reduced corporate staff, though the companies expect that greater savings could be realized from productivity improvements and reduced operational costs for unregulated and interstate services. Half of the anticipated savings, for example, is expected to be realized by moving all traffic from both carriers to one common IP network.

Separate branding for Cingular Wireless and BellSouth services would cease as the merger moves forward, with all wireline and wireless services moving under the AT&T brand, just as discrete SBC branding has virtuall halted.

In the case of Cingular, the ex-Qwest source said that Cingular has a better brand reputation than AT&T Wireless, a factor that should suggest caution in integrating branding. Wireless is becoming an increasing element of both AT&T’s and BellSouth’s business, to the point where its contribution to revenues in 2007 is expected to exceed one-third the total revenue of the combined companies.

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