SBC-AT&T Merger Would Get Approved But Take Time, Divestitures

SBC and AT&T have reportedly been in talks about a possible merger that could cost SBC more than $15 billion. Citing people familiar with the deal, The Wall St. Journal reported Thurs. that executives of both companies have been meeting the past few weeks to discuss a merger. SBC and AT&T spokespeople declined to comment. This isn’t the first time SBC and AT&T have discussed a merger. Executives discussed a deal around Thanksgiving but didn’t come up with an agreement, according to the Journal. But the paper said the talks got serious this time.

The merger would likely get strong regulatory scrutiny, many predicted. The deal would probably be opposed by the Democratic commissioners at the FCC, who have expressed concerns about decreasing competition in the market. Their position could be fueled by strong opposition from consumer groups concerned about further diminished competition and higher prices. Consumer Federation of America Research Dir. Mark Cooper told us the merger would represent “the continuous deterioration of competition in the telecom sector, with an evolving cable-Bell duopoly.”

Sources said they didn’t expect to see any opposition from the Republican commissioners. The current candidates to fill the chairman position -- ex-Tex. PUC Chmn. Pat Wood and Becky Klein -- “have taken aggressive pro- competitive stands toward SBC, a fact that is likely to weigh heavily on the minds of both parties,” Medley Global Advisors said in a report. It said it didn’t expect to see political hurdles at DoJ under new Attorney Gen. Alberto Gonzalez. It also said the House and Senate Commerce Committees would likely change their telecom agendas to discuss the merger and what it means for the larger intercarrier payment and USF reform debate.

The merger would probably take a long time to be approved, many agreed. Medley Advisors said the timetable for federal and state approval was “not likely to move fast… The many questions looming over the potential merger make approval of the deal far from certain.” Legg Mason predicted regulators would probably take 15-20 months to approve the merger. It said at least 2 considerations could prolong govt. review: (1) “It would be the first merger that starts putting back together the pieces of a company that was broken up decades ago by the courts.” (2) “The regulators in the SBC states would have significant leverage.” One industry source predicted the merger would get through, but not until summer of 2006 in part due to FCC turnover. FCC Chmn. Powell is leaving in March and Comr. Abernathy is rumored to follow. But Cleland said the deal would probably be done before the end of this year: “The FCC can walk and chew gum at the same time.”

State regulators would likely put the deal through substantial scrutiny, analysts agreed, noting that SBC didn’t have good relationships with many state regulators. “The federal and, significantly, state government authorities would have to struggle long and hard to understand and address to their satisfaction the full market and policy ramifications of allowing one of the 2 largest Bells to partner with their traditional rival,” Legg Mason said. Medley Advisors noted that acquiring all of AT&T’s Alaska properties would give SBC “a whole new level of influence in Alaska politics, which is considered a top priority among telecom providers wishing to gain favor with the current Senate Commerce Committee Chairman.”

Sources agreed regulators would look closely at the merger’s impact on the business market, still dominated by AT&T, MCI and Sprint. “Even though SBC is not a significant player now, regulators may have concerns that the deal will diminish the potential for a new, fiercely competitive player to enter the market,” Medley Advisors said: “Antitrust regulators evaluate deals on how they project it will impact the market over a 2-year period.”

Legg Mason said a key area of govt. review and divestiture requirements would be in-region residential and small business operations. It said the merger would be “more palatable” to regulators because of AT&T’s decision to stop marketing to the local consumer market. But it said the approval would likely require divestitures of any AT&T consumer business in SBC’s region, and “this would not be easy. The company would have to sell to a viable entity and for a variety of reasons that could be tricky.” Legg Mason also said states would play a very significant role in reviewing those divestitures and may apply some in-region, company-specific conditions related to, for example, network sharing, to ensure that others can compete in the consumer and small business markets.

Regulators would also take a close look at the deal’s impact on the Internet backbone marketplace, some said. They said the Sprint-MCI merger was blocked mostly due to the concerns that it would concentrate the IP backhaul market. “This issue is even more critical in 2005 because IP-based voice competition from cable and stand alone players such as Vonage, depends on access to the IP backbone,” Medley Advisors said.

While the deal could represent a good business decision for AT&T, it probably wouldn’t benefit SBC, several analysts said. “We think AT&T would be an interested seller at the rumored price but remain unconvinced the transaction… would create significant value for SBC shareholders,” Legg Mason said. Cleland said: “It’s a really dumb idea for SBC.” The transaction would give SBC access to the govt. sector and enterprise market, which the company has been actively pursuing. Cleland said getting access to the enterprise market wouldn’t do any good to SBC because “the enterprise business is a lousy business in the future” and “government is not a great business either,” because it’s low margin.

The big question is Verizon’s strategy, analysts said. A Verizon spokesman declined to comment, but Chmn. Ivan Seidenberg assured analysts and investors in a financial conference call Thurs. the company wouldn’t change its strategy with respect to the business market as a result of the possible SBC-AT&T deal. Legg Mason said: “We do not anticipate that a bidding war would erupt for AT&T.”

The merger talks aren’t surprising in light of recent regulatory decisions and industry transformation, many said. Medley Advisors said the discussions between SBC and AT&T were “catapulted” by the FCC UNE decision: “In a post-UNE-P world, particularly one where the consumer long distance business is dying, a deal like this may appeal to regulators and policy makers but it will take a massive PR campaign to win approval.” An industry source noted: “Ironically, the FCC’s decisions would help pave the way for these transaction to go through.” Legg Mason noted that “a Bell buying a long distance company is tough to rationalize.”