Dealwatch: AT&T-BellSouth

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Published January 2, 2007 at 12:51 PM

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The Federal Communications Commission came through Dec. 29 and approved the $80 billion AT&T-BellSouth merger, creating for chairman and chief executive Ed Whitacre, a telecom behemoth.

After months of regulatory scrutiny amid the competition's outcries, approval for the deal hinged solely upon the FCC's OK, and until the 11th hour, it looked like we would have had to wait until 2007 to see whether it could pass regulatory muster. But an FCC vote on the merger, which will largely marginalize the No. 2 U.S. telecom carrier, was pushed back twice since October and didn't make the commission's agenda for a scheduled Dec. 20 meeting. FCC approval was the only hurdle remaining in place, after the Department of Justice gave the megamerger its own, unconditional blessing in October.

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THE GREAT COMPROMISE

On Dec. 28, AT&T offered a new filing with a series of conditions, which appeased the commissioners, who had been deadlocked 2-2 along party lines after republican Robert McDowell, a recent appointee to the FCC's five-member panel, recused himself from the decision. He was formerly the assistant general counsel for the Washington-based Competitive Telecommunications Association, or Comptel, where he was a vocal critical of major telecom mergers.

As The Deal's Ron Orol reported:

"...McDowell's decision earlier this month not to vote on the deal put pressure squarely back on AT&T to offer conditions that would win bipartisan consensus at the agency. It gave the agency's two Democrats, Michael Copps and Jonathan Adelstein, additional leverage in negotiating the terms of the deal.

Without McDowell, Martin and fellow Republican commissioner Deborah Tate had been trying to snag the third vote needed to approve the deal by negotiating with Copps and Adelstein who had been demanding several conditions that Martin opposes. Martin had been reluctant to grant concessions to the Democrats that both he and AT&T have opposed, but in an effort to obtain approval of the merger, they agreed to a series of late new conditions."

One key issue with this deal is a fear that the combined company will have the power and incentive to deny access to its Internet backbone to other competitors. AT&T agreed to a “net-neutrality” requirement prohibiting merging companies from blocking or interfering with data or voice services that must be carried over big phone companies’ networks. The restriction applies for two years or until Congress approves net-neutrality legislation.
AT&T also agreed to the divestiture of all of the valuable BellSouth spectrum located at the 2.5 gigahertz portion of the spectrum band within a year of the deal's closing. The Democratic commissioners want the agency to auction it to competitors to develop new Wi-Fi services. In April, a watchdog group called for federal regulators to order large portions of the wireless communications spectrum controlled by the two sold to competitors that have greater incentive to quickly build broadband Wi-Max networks over them.

A LONG SEVEN MONTHS

The deal was suspended in regulatory tie-ups for the better part of 2006.

On May 1, the DOJ failed to issue regulatory clearance for the pending merger and decided to give it a second look.
Ten days later the U.S. District Court for Washington D.C. held a hearing on challenges to the SBC-AT&T and Verizon-MCI mergers.
On June 5, public requests to the FCC to deny the merger came due. A group of leading U.S. telecom companies filed comments urging the Federal Communications Commission to deny the merger, citing irreparable harm to competition and the public interest.

BULKING UP

The megamerger is AT&T's latest deal in a series of many and would make it the top carrier in 22 states. The deal is widely expected to gain clearance, but with some restrictions.

In the last two big-ticket, U.S. telecom deals, both approved in October 2005, regulators placed certain restrictions on the companies and similar ones were expected in this case.

In the $16 billion SBC Communications Inc. purchase of AT&T Inc., which yielded a company with the old AT&T Corp. name, as well as the $8.4 billion deal in which Verizon Communications took MCI Inc., the DOJ required the acquirers to let rivals lease spare capacity in buildings where their networks overlapped with targets .
The FCC imposed a net-neutrality requirement.

What kicked the SBC-AT&T combination off was the $47 billion cash-and-debt deal that an SBC-BellSouth joint venture, Cingular Wireless LLC, made for AT&T Wireless Services Inc., in October 2004.

SPOILERS

Meanwhile, in distant-second land is Verizon and its next few moves may be telling. The carrier sold $3.7 billion worth of Caribbean and Latin American assets last month to América Móvil SA de CV. It has been weighing asset sales for several properties to raise cash, pay down debt and possibly acquire the remaining 45% stake in Verizon Wireless. The company's wireless arm is co-owned by Britian's Vodafone Group plc which is itself facing mounting pressure over its disappointing stock price and needs to come up with its own strategic response to the AT&T-BellSouth deal.—Carolyn Murphy

Dealwatch executive summary
Date	Action
12.29.06	FCC gives AT&T-BellSouth green light.
12.14.06	An FCC vote on AT&T-BellSouth appears unlikely before 2007.
11.03.06	FCC vote on AT&T-BellSouth stalls again.
10.13.06	FCC stalls on granting merger approval, two days after the DOJ approved it.
9.2006	AT&T-BellSouth merger approval appears to be imminent.
6.05.06	Public complaints on the merger are due to the FCC. The competition cries out.
5.02.06	Company officials confirm the Department of Justice issues a second request for information on the proposed $67 billion AT&T-BellSouth deal.
4.25.06	Company press release on first-quarter 2006 earnings.
4.13.06	The dealmaking world waits to see what Vodafone and Verizon will do in response to the proposed megamerger.
4.11.06	A Washington-based watchdog group calls for large chunks of wireless spectrum the combined company would own be ordered sold by regulators.
4.07.06	Verizon sells off its Latin American assets to América Móvil SA de CV for $3.7 billion. (See related Deal memo)
3.29.06	Transcript of a conference call on the likely impact of the proposed deal.
3.14.06	In response to the FCC imposing a "net-neutrality" restriction on SBC-AT&T and Verizon-MCI, telecom analysts advise U.S. lawmakers not to impose excessive government restrictions on the industry, which could thwart M&A activity.
3.14.06	Company press release announces the AT&T-BellSouth merger.
3.08.06	It seems an important hurdle for the deal will be the possibility of the combined company preventing competitors access to its Internet backbone.
3.04.06	AT&T and BellSouth unveil merger plans.
2.03.06	President Bush nominates Republican Robert McDowell to be the fifth FCC commissioner. If confirmed, it will swing the commission to a 3-2 Republican majority. Later, he vows before the Senate that if confirmed, he will work with FCC counsel on whether to recuse himself from certain reviews, like this one.
1.09.06	Having closed their respective SBC-AT&T and Verizon-MCI unions, the new telecoms set their sights on the post-M&A future.
10.2004	The SBC-AT&T deal has its origins in the $47 billion deal Cingular Wireless LLC made for AT&T Wireless in October 2004. The acquirer is a SBC-BellSouth joint venture. At the combined company's helm is Edward Whitacre, an old hand at dealmaking between these companies.
Source: The Deal