Is an SBC/BellSouth Merger Next?

Now that the Verizon Communications Inc. (NYSE: VZ) acquisition of MCI Inc. (Nasdaq: MCIP) and the SBC Communications Inc. (NYSE: SBC) acquisition of AT&T Corp. (NYSE: T) are headed for completion, some believe it is only a matter of time before SBC acquires BellSouth. The reason: the two RBOCs' joint ownership of Cingular Wireless LLC. (See SBC Brass Dominates the New AT&T .)

Conversations about the likelihood and timing of such a merger have been going on within the investment and regulatory communities for the past few months, sources say. (See FCC Clears Megamergers.)

Legg Mason Inc. analyst and former Federal Communications Commission (FCC) chief of staff Blair Levin recently predicted: “The announcement that SBC is acquiring BellSouth will come within 24 hours after they [SBC] close the deal with AT&T.

“I can already see the press release from SBC: 'The combination of the two companies will finally give us the scale we need to roll out broadband service,' ” Levin said, jokingly, at the Telecom '05 show in October.

Telecom and regulatory analysts believe the companies would rather merge than enter a costly custody battle over Cingular, or worse yet, go without a wireless element in product bundles for enterprises. (See Source: SBC Plans IPTV for Businesses.)

The chase for new enterprise business -- arguably the central reason for SBC’s and Verizon’s 2005 acquisitions -- will create a tougher environment in which the Cingular joint-ownership might go forward peaceably, Levin said in a conversation with Light Reading. “It will become more and more difficult over the next few years as SBC/AT&T seeks to serve enterprise customers in BellSouth’s region -- in part by using Cingular Wireless service as part of a package.” (See Merged Telcos Will Sport Different Looks.)

“BellSouth wants to do the same thing with Cingular. So you get into complicated questions about strategy and marketing.”

Levin says SBC will not be willing to give up its share of Cingular. And while a number of large merger scenarios could fix BellSouth’s need for its own wireless property, the path of least resistance is likely a merger with SBC.

“There are lots of scenarios that you could think about and theorize about. But the simplest is just for SBC to say ‘Now is the time for all good Baby Bells to come to the aide of their Mother.' ”

Many believe SBC has entered serious acquisition talks with BellSouth on several occasions in the past, but that the two couldn’t come to terms on price. Now, with both Verizon/MCI and SBC/AT&T headed for completion, both sides may come to the table with more impetus to reach a deal.

“We’re going to have a new AT&T, the only question now is under what circumstances and when SBC can buy BellSouth,” says Washington D.C.-based telecom attorney Dana Frix of Chadbourne & Parke LLP. “The analysis that has been applied to approving the SBC/AT&T merger is the same analysis that can be applied to a merger of SBC and BellSouth.”

SBC and BellSouth, for now, don’t want to talk about the matter publicly.

“We have no plans or intentions to merge with SBC,” says BellSouth spokeswoman Nadine Randall. “We are going at it as a standalone company and we are very confident about that.”

“That’s nothing more than mere speculation.” says SBC spokesman Wes Warnock. “As far as Cingular goes, the partnership is working really well... If you were to look at a merger between SBC and BellSouth, there would certainly be a pretty good amount of regulatory scrutiny there."

Indeed an SBC/BellSouth pairing seems as if it would contain all sorts of regulatory pitfalls. (See Altnets Tackle FCC Over Merger and XO Criticises Verizon-MCI.) But attorney Dana Frix says the same presumption came with consideration of the SBC/AT&T and Verizon/MCI mergers, and they went through with very few regulatory speedbumps.

Frix believes policy-making failures at the federal and state levels have contributed to a gradual slide back to the days of Ma Bell. “We don’t have a government policy that provides a foundation on why the government should impose regulations on these things anymore,” Frix says. (See DOJ Clears SBC/AT&T Merger.)

“The states should be ashamed of themselves for not asserting themselves in this,” he notes. “They should have stood up and said ‘We are an important part of the competitive landscape that makes the market work efficiently.’

“The game is over. This is terrible for consumers.”

— Mark Sullivan, Reporter, Light Reading