AT&T Deal Seeks Growth Through Cingular

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The prospects of fully owning the faster growing Cingular Wireless business and gaining access to BellSouth’s lucrative southeast market may have been the catalyst for AT&T’s US$67 billion acquisition of the Baby Bell. While the idea of a merger seemed only natural for the two longtime partners in Cingular Wireless, the nation’s No. 1 cellular telephone company company, AT&T just went through a big merger – the $16 billion acquisition of the original Ma Bell by SBC Communications in November. Attempting two major acquisitions in the space of a few months might seem like a lot to bite off.

The crown jewel of the deal is Cingular Wireless. BellSouth currently owns a 40% stake, while AT&T controls the remaining 60%. By taking the entire stake in Cingular, AT&T will better be able to take advantage of the wireless business’ faster growth and rising margins.


“They’re getting in at near the ground level,” said William Power, an analyst with Robert W. Baird & Co.

In addition to Cingular, AT&T will also gain access to the fast growing market in the U.S. Southeast. BellSouth has so far shown restraint in the prices it charges for phone and DSL connections, while AT&T has aggressively cut its prices to add market share. AT&T can maintain BellSouth’s strategy of keeping prices up to boost margins, or it can cut prices in the region to speed its gain in market share for high-speed Internet customers. Either way, analysts view it as an opportunity for growth.

“There’s an opportunity for AT&T to be more aggressive than BellSouth has been,” Power said. “The Southeast is among the strongest markets in the U.S.”

The Federal Reserve Banks of Atlanta and Richmond reported in the January “Beige Book” report that economic activity in their regions accelerated or increased at a solid pace during the last several weeks of 2005.

“What they’re buying are the rights to access one of the fastest growing regions in the country,” said Roger Entner, an analyst with research firm Ovum.

In addition, the deal gives AT&T bulk as it competes with cable companies, which have been introducing Internet-based telephone services, and rival Verizon Communications. A combined AT&T-BellSouth would have a market capitalization of $159 billion at Friday’s closing prices, compared with $93 billion for Verizon and $58 billion for Comcast Corp.

Since AT&T and BellSouth don’t compete directly in the same local and long distance markets, and BellSouth is not a significant competitor in the enterprise market, the combined company has the potential to recreate the dominance of the former AT&T.

The deal would combine SBC’s market, which is focused in the Southwest, with BellSouth’s market in the Southeast, consolidating their position in states such as California, Texas and Florida. The expanded market would give AT&T a larger base to sell additional services such as DSL – a strategy the Bells have been employing to offset eroding voice revenue – as well as leave it better able to compete against the cable companies.

“It gives them a larger reach so they can fight cable in their whole footprint,” Entner said. “Now, there’s no hiding from AT&T.”

AT&T is already taking shots at cable, declaring in its announcement of the merger that the combined company will accelerate its play for cable operators’ television customers.

“Consumers seeking a real alternative to cable monopolies should see faster and more economical deployment of next-generation IP television networks,” AT&T said in its release.

The deal is just the latest for AT&T Chairman Ed Whitacre, who bulked up SBC with acquisitions of companies like Pacific Telesis Corp., Ameritech Corp. and Southern New England Telecommunications Corp.

While AT&T’s interest in BellSouth isn’t a surprise, the timing is, considering AT&T and SBC are still in the middle of integrating their operations. SBC spent $16.5 billion to acquire AT&T, and the combined company ended the year with $1.22 billion in cash and cash equivalents.

“You’d think they’d want things to quiet down a little bit before going after BellSouth,” said Patrick Comack, an analyst with Zachary Investment Research,

AT&T says the acquisition, expected to close in the next 12 months, will add to earnings per share in 2008 assuming merger related costs are stripped out. The deal should also increase free cash flow after dividends in 2007 and 2008, according to San Antonio-based AT&T.

AT&T sees more than $2 billion a year in cost savings from the deal starting a year after it closes. Some will come from a decision to shed the BellSouth and Cingular brands in favor of a straightforward AT&T.

While AT&T said it believes the integration of its wireless service under the AT&T brand will be a positive, some critics aren’t so sure. Entner, of research firm Ovum, said that bringing back the AT&T Wireless brand, which was haunted by issues of poor customer service, is a bad idea. It doesn’t make sense for AT&T to move away from the Cingular brand, which is considered “hipper” in the eyes of the younger generation, he said.

Still, AT&T has made progress in improving its image following the merger with SBC, and Power said he believes it will do the same with the wireless business.

“This will probably be a continuation of the reinvigorating of the AT&T brand,” he said.

The analyst reported no conflicts of interest.

The combination of Cingular, BellSouth and AT&T could yield significant cost savings. Analysts believe those cost savings may even surpass those realized from the AT&T-SBC deal. Zachary Research analyst Comack said much of the savings will come from general administrative costs, since the two companies run similar operations but compete in different areas. The analyst has no conflicts of interest to report.

AT&T forecasts total savings with a net present value of $18 billion. That equals the estimated $18 billion in merger cost savings from the SBC-AT&T deal.