Under the terms of the all-stock deal, AT&T is expected to pay $37.09 per BellSouth share. The equity purchase price is $67.1 billion, but after BellSouth’s $16.8 billion net debt burden, plus its proportionate Cingular Wireless net debt of $5.5 billion, the total value of the deal rises to a staggering $89.4 billion. The takeover will create a new giant in the US telecoms sector, with a market capitalization of $170 billion plus.
The deal has the backing from both boards, but has yet to be approved by regulators and shareholders. There are some concerns that state regulators could log objections, but realistically the biggest hurdle is going to come from the US federal authorities, especially as the proposed purchase of one of the four remaining baby Bells could mean the resurrection the old Ma Bell telephone system, which was broken apart in 1984.
AT&T, however, remains confident that there will be little or no regulatory objections.
AT&T Inc was created when SBC Communications closed its $16 billion purchase of long-distance carrier AT&T Corp in November last year. In reality, the AT&T of 1984 and the AT&T of 2006 are two entirely different beasts, with the principle difference being the fact that the current AT&T is in actual fact one of the baby Bells (formerly SBC Communications) that was spun out of the old AT&T back in 1984.
So what does the deal give AT&T? Specifically, it would give the Texas-based carrier control over Georgia-based BellSouth’s nine-state network in the southern US. More importantly however, the key driver of the acquisition is BellSouth’s 40% stake in Cingular Wireless.
Cingular Wireless is actually a 60:40 joint venture between AT&T and BellSouth, and so the deal gives AT&T full control of the mobile operation. Cingular is currently the number one mobile operator in the US, and during the fourth quarter it reported a 1.82 million rise in subscribers, giving it a healthy total customer base of 54.1 million subscribers.
However, there are signs that Cingular has been losing market share recently to second-placed mobile operator Verzion Wireless, a 55:45 joint venture between Verizon Communications and the UK’s Vodafone Group. Verizon Wireless added two million customers during the last quarter, giving it 51.3 million subscribers at the end of 2005.
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The merged company is expected to have 70 million local-line phone customers, 54.1 million wireless subscribers and nearly 10 million broadband subscribers across 22 states. The merger is expected to save as much as $18 billion in combined synergies, with $2 billion saving expected annually from 2007.
The cost savings will principally come from workforce reduction and from reduced advertising expenses as the three brands are merged into one entity. The rest of the savings would come from combining the backbone network and information-technology operations of the two companies.
The shockwaves from the acquisition are likely to be felt across the industry over the coming months. Already there is speculation on how the deal will affect smaller equipment suppliers, and possibly even outfits such as Lucent Technologies and Nortel Networks.
However, the shockwaves are unlikely to stop there. Vodafone, which is already under severe pressure to offload its 45% stake in Verizon Wireless, is likely to come under renewed pressure from the 55% shareholder, Verizon Communications, which is desperately keen to acquire full control of the mobile unit.
Indeed, is it possible that Verizon Communications could conceivably make a move for its smaller sibling, the fourth largest US telecoms operator, Qwest Communications International.
Verizon, however, is still digesting the $8.6 billion acquisition of the second largest US long-distance telephone provider, MCI (formerly WorldCom) last year. It is also still smarting from the fact that its mobile unit (Verizon Wireless) was knocked off its number one position when SBC acquired AT&T Wireless Services for $41 billion back in February 2004. Full control of Verizon Wireless would allow Verizon to concentrate on regaining the number one spot, without have to consult its minority partner.
The size of the AT&T/BellSouth deal took some by surprise, as there have been precious few deals of this magnitude in recent years. One of these was WorldCom’s failed $115 billion bid for Sprint, but the largest deal to date came when UK mobile goliath Vodafone Group agreed to pay approximately $180 billion for the German conglomerate Mannesmann way back in 2000.
As to the potential impact on business customers, the move will reduce competition in local and long-distance telephony, but it should also enable the enlarged AT&T to offer fixed-mobile convergence (FMC) services across the entire Cingular customer base once the mobile business comes entirely part of its operation.
If Cingular also becomes a 100% subsidiary, it will be to offer cellular connectivity over the Cingular network, which is on track to complete 3G coverage for most of the US by the end of this year.
Furthermore, Cingular has been tightening its collaboration with Rogers in Canada and Orange in Europe to enable not just roaming, but also cross-discounting on corporate accounts, so one would expect the Vodafone relationship, which is technical rather than strategic, to be replaced by Orange and other Cingular partners going forward. At that point, its access-neutrality may disappear in favor of getting more corporate traffic running across its network and those of its strategic partners.
