Huge Phone Deal Seeks to Thwart Smaller Rivals - New York Times

Huge Phone Deal Seeks to Thwart Smaller Rivals - New York TimesMarch 6, 2006
Huge Phone Deal Seeks to Thwart Smaller Rivals
By KEN BELSON

The AT&T Corporation, in announcing plans yesterday to buy BellSouth Corporation for $67 billion after months of speculation, took the offensive against low-cost rivals in the free-for-all for phone, wireless and television customers.

With cable providers and technology companies entering the phone business, the former Baby Bells starting to sell television programming and more and more services available on mobile phones and on the Internet, companies like AT&T are trying to bulk up and turn themselves into one-stop shops for all communications needs.

"We literally have hundreds of competitors coming in every day; it's nothing like the old days," said Edward E. Whitacre, Jr., the chairman and chief executive of AT&T, the country's largest phone company. "If we're going to have the strength to compete, we better get our companies together."

The new company, with $120 billion in sales, about 317,000 workers and 71 million local phone customers in 22 states, would recreate a big chunk of the former AT&T monopoly that was broken up a generation ago. With the deal, only three Baby Bells would remain: AT&T, the former SBC Communications that provided service in the Southwest and elsewhere; Qwest and Verizon, the $90 billion company which is AT&T's chief rival. The latter two might now face renewed pressure to build themselves up.

The merger, one of the dozen largest deals ever, was long the subject of speculation and got a major push in January when the chiefs of both companies went bird hunting together in Georgia.

The deal still must pass muster with regulators and it will probably face close scrutiny from consumer groups and AT&T's main competitors who argue the merger would give AT&T too much power and will ultimately lead to higher prices.

But while AT&T — which was formed last year when SBC bought the long-distance carrier, AT&T — might look much like its old self, the landscape where it competes is completely different. In 1984, when the old Ma Bell was broken up, the Internet and cellphone service barely existed and the cable industries was far smaller.

The new, more complex environment is a big reason why anti-trust watchdogs have not blocked large phone deals in recent years. Regulators in the Bush Administration have also been generally sympathetic to mergers, which has not escaped AT&T's attention, analysts said.

Indeed, AT&T and BellSouth consider themselves complementary partners because they compete very little for local phone and Internet customers, and they jointly own Cingular Wireless.

As a result, consumers buying services from AT&T, BellSouth and Cingular are unlikely to see much immediate impact. Ultimately, the companies hope that their new size will help them hold down their prices and potentially undercut cable and satellite companies with cheaper television programming, which they are just beginning to introduce.

Any benefits to customers notwithstanding, consumer groups expressed concern about a deal to merge the two companies.

"Things were already quite bad, but this eliminates any possibility of phone companies competing against each other," said Gene Kimmelman, the vice president for federal policy at Consumers Union, which publishes Consumer Reports. "The bottom line for consumers is that you can kiss goodbye the declining cellphone and long distance prices that people have become used to." Investors have considered a union between AT&T and BellSouth likely because of their mutual stake in Cingular and because of their shared history as Baby Bells.

Mr. Whitacre has not been shy about paying top dollar for rivals to scare away other bidders. In the past decade, he bought three other local phone companies, Pacific Telesis Group, Southern New England Telecommunications and Ameritech Corp.

In 2004, Cingular bought AT&T Wireless for $41 billion, and last year, SBC bought AT&T for $16.8 billion and adopted 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."

AT&T said it would pay $37.09 for BellSouth's shares, which is 17.9 percent above the closing stock price on Friday. The company, whose headquarters will remain in San Antonio, said it expected to save about $2 billion a year by buying BellSouth, some of which would come from an unspecified number of job cuts. AT&T planned to keep its name if the merger is approved, and Mr. Whitacre would remain at the helm.

With the deal, Duane Ackerman, the chairman of BellSouth, and several of his top lieutenants stand to collect hefty special payments, according to the terms of their employment contracts. Mr. Ackerman, who 63 years old and nearing retirement, could sell $28,374,000 worth of restricted stock and options if he is asked to leave the company, according to publicly filed documents.

Mr. Whitacre and Mr. Ackerman have been inching closer to a deal for years. In the fall of 2004, the companies held extensive negotiations, but the talks collapsed after BellSouth pushed for a price that included a premium of more than 30 percent, people involved in those talks said.

Mr. Whitacre then turned his attention to buying AT&T. Just days before that deal was signed, BellSouth tried to return to the bargaining table, seeking a premium of slightly more than 20 percent, these people said. But it was too late for Mr. Whitacre to turn back.

When SBC absorbed AT&T in November, Mr. Whitacre turned once again to BellSouth because, among other reasons, the two companies were having trouble managing Cingular. In mid-January, Mr. Whitacre sent one of his bankers, Roger Altman, who worked in the Treasury Department under President Clinton, to approach Mr. Ackerman again and make an informal proposal. The next day, Mr. Whitacre and Mr. Ackerman went bird hunting, these people said.

After their day out, the men promised to go to their boards and pursue a deal. Several weeks later, the executives met again privately and shook hands on a deal, setting off another three-week marathon of conference calls and meetings.

The deal was given the code name Project Mountain, while AT&T was referred to as Aspen, BellSouth was called Birch and Cingular Cedar. The mountain theme was chosen because, as one person put it, "This deal has been a long climb."

Over the last three weeks, both sides camped out at the midtown Manhattan offices of Sullivan & Cromwell, which represented AT&T. Mr. Whitacre called in from Turino, where he was watching the Olympics. On Saturday, the boards of both companies met to approve the transaction.

The new company would dwarf its nearest competitor, Verizon, which has in the past reacted to Mr. Whitacre's deals by following with ones of its own. After SBC bought AT&T last year, for example, Verizon outbid Qwest Communications for control of MCI Inc., the long-distance carrier.

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

Less likely, Verizon could also pursue Qwest, the primary local phone provider in the western United States, which is saddled with heavy debts. Verizon may also look more closely at Alltel, the country's fifth-largest wireless carrier.

"Verizon's business plan remains unchanged," said Peter Thonis, a Verizon spokesman. "We are focused on integrating MCI, divesting our directories business and working to acquire from Vodafone the remaining 45 percent of Verizon Wireless."

Verizon, like AT&T, is also trying to head off its rivals by offering its own television services. But the construction of the networks to carry their programming is proving expensive and the carriers have had to acquire permission from municipalities to sell their service.

The Bells have asked lawmakers in Washington to help them streamline the process, alarming cable companies that have moved closer together to defend themselves.

In addition to selling home phone lines, Comcast, Time Warner Cable and other cable companies are working with Sprint-Nextel, the third-largest cellphone company, to introduce mobile phone services that compete with Cingular and Verizon Wireless.

Cable companies are also using Sprint's long-distance network to carry its phone calls to rely less on AT&T and Verizon.

"Cable and Sprint are the counter force to the Bells," said Daniel Berninger, an analyst at Tier 1 Research. "The cable guys may get more aggressive and stick it to the Bells" as a result of an AT&T-BellSouth deal, he said.

Mr. Berninger said cable companies might distance themselves from a plan by the Bells to charge content providers like Amazon and Yahoo to guarantee that their content is delivered to customers faster. Consumer groups, technology companies and lawmakers worry that such a service would destroy the open nature of the Internet.

Andrew Ross Sorkin and Eric Dash contributed reporting for this article.