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SBC to Buy AT&T for $16B

Light Reading
LR Mobile News Analysis
Light Reading
1/31/2005

It's on. SBC Communications Inc. (NYSE: SBC) has agreed to acquire AT&T Corp. (NYSE: T) in a $16 billion deal that first came to light last week and was completed over the weekend (see SBC to Acquire AT&T and SBC/AT&T: Possible Winners & Losers).

The companies will discuss details on a conference call at 9:00 a.m. Eastern time today.

The deal would swap 0.77942 shares of SBC for each AT&T share, valuing AT&T at $18.41 per share, based on the Jan. 28 closing price. That's a 6.5 percent discount to AT&T's Friday closing of $19.71, but AT&T has pledged to make up the $1.30-per-share gap in the form of a tax-free dividend sent to shareholders once the deal closes.

The companies expect the deal to close "by the first half of 2006," subject to AT&T shareholder and regulatory approval, according to SBC's press release.

If the acquisition is successful it would complete the merger of the two operators' fixed and wireless businesses. Cingular Wireless, of which SBC owns 60 percent and BellSouth Corp. (NYSE: BLS) 40 percent, acquired AT&T Wireless last October (see Cingular Completes AT&T Deal).

So who will run the new supercarrier? SBC says its chairman and CEO Edward Whitacre will retain those titles once the deal is closed, and the company will keep its headquarters at SBC's San Antonio home.

AT&T chairman and CEO David Dorman will become president and sit on the board of directors along with two other members of AT&T's board.

The acquisition would substantially broaden SBC's prospects, giving the carrier more service ammunition in its battle with Qwest Communications International Inc. (NYSE: Q) and Verizon Communications Inc. (NYSE: VZ), both of which operate in SBC territory.

SBC officials say new opportunities will include marketing AT&T's IP services to small businesses and residential customers, and a potential push into enterprise wireless sales is possible.

But AT&T is going to be an anchor on earnings. SBC officials say the acquisition will slow the company's revenue growth, with profits unlikely to come until 2008, though the company looks to be cashflow positive in 2007.

This isn't particularly surprising, given that AT&T lost $6.1 billion, or $7.68 per share, on revenues of $30.5 billion in 2004. The carrier has also predicted that revenues are likely to fall to about $26 billion in 2005 (see AT&T Announces 4Q Earnings).

And life hasn't been all rosy for SBC lately, as the company laid off 7,000 in 2004 and lost 192,000 retail access lines in its fourth quarter. Data services have helped perk up SBC's mood, as the company added 425,000 DSL lines in the fourth quarter, bringing its total broadband customer base to 5.1 million (see Cutting the Fat (Really) and SBC Puts on a Happy Face).

With AT&T now effectively sold, analysts see MCI Inc. (Nasdaq: MCIP) as a likely next domino, with potential buyers including BellSouth and Qwest. And at least one analyst thinks Sprint Corp. (NYSE: FON) could be a target for Verizon (see SBC/AT&T Could Ignite M&A Frenzy).

SBC intends to retain the AT&T name in the new corporate identity, to judge from Whitacre's prepared statement: "We value the heritage and strength of the AT&T brand, which is one of the most widely recognized and respected names throughout the world, and it will certainly be a part of the new company's future."

Light Reading will update this story as more details come to light.

— Craig Matsumoto, Senior Editor, Light Reading

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