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Is an SBC/BellSouth Merger Next?

Light Reading
News Analysis
Light Reading
11/14/2005
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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

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lightpimp
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lightpimp,
User Rank: Light Beer
12/5/2012 | 2:54:13 AM
re: Is an SBC/BellSouth Merger Next?
It is inevitable that the RBOCs consolidate. It's all going back to the "Ma Bell" concept so that phone companies are only competing against the cable industry and not dualing it out within the Brotherhood. VoIP is the MSOs prime weapon of choice while the telcos have IPTV. It going to get all much more interesting in the next few years that's for sure!
stephencooke
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stephencooke,
User Rank: Light Beer
12/5/2012 | 2:54:13 AM
re: Is an SBC/BellSouth Merger Next?
Verizon/Sprint...?

This one in particular would be quite interesting given the recent collaboration of Sprint and 4 leading cable providers...

See http://www.lightreading.com/do...

Steve.
Ringed?
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Ringed?,
User Rank: Light Beer
12/5/2012 | 2:54:11 AM
re: Is an SBC/BellSouth Merger Next?
Oh well.. I say merge like hell. Then in 10 years their heavy handed tactics coupled with broadband litigation and some form of fixed wireless should cause another break.

Then we will have a 1996 like evironment that led to Telcom Zenith of 1999. We will have one more running of the bulls then we can all finally retire from the excess (again) and go work at Home Depot.

Ringed?
ynova111
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ynova111,
User Rank: Light Beer
12/5/2012 | 2:54:08 AM
re: Is an SBC/BellSouth Merger Next?
Voice Land lines are heading down the horse and buggy slow death march. MSO - VOIP, who cares; land line voice is old news.

Give me a 5/2 mbyte/sec fiber drop to my house, I'll take a fraction of that for my "unlimited" voice service & data. Land "phone" service will grow with video - phone service. One needs BW for that, which fiber has in both directions. MSO's are 10-20 years too late with their land line voice services.

Given the $50 / month all you can chew pricing from Comcast / MSO's, I would rather throw that money into a cell phone plan; keep a $15 / month POTs land line "just in case" service.

If the MSO's offer me a $10 a month all you can chew VOIP plan, I might take it. Rather have the long term dependability of POTs when and if I need to call the police / ambulance service.
spelurker
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spelurker,
User Rank: Light Beer
12/5/2012 | 2:54:06 AM
re: Is an SBC/BellSouth Merger Next?
> Land "phone" service will grow with video - phone service

Feh. Video phone services have been around in many forms over the years, and met with a collective yawn. I don't see that changing. (Do you really need to see the Indian call center guy who's trying to sell you something during your dinner? Do you really want anyone to see you when they call on sunday morning?)

> I would rather throw that money into a cell phone plan
Cell phone is indeed a big deal, and the avenue for future growth.

falsecut
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falsecut,
User Rank: Light Beer
12/5/2012 | 2:53:48 AM
re: Is an SBC/BellSouth Merger Next?
That whirling sound you hear is Judge Green spinning in his grave. The worst thing is that our RBOCs seem to be unable to be in the least bit creative on the management end of things. They are still the same bureaucratic stick in the muds that they were 30 years ago.
milliman
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milliman,
User Rank: Light Beer
12/5/2012 | 2:53:29 AM
re: Is an SBC/BellSouth Merger Next?
Most of you are either too young or not in the industry to remember the reason for divestiture. Resentment had been growing for decades against Ma Bell, and AT&T wanted to spread its wings into the international market and computer business where consent decreed had prevented it from entering. Since some action was inevitable, the execs and lawyers at AT&T orchestrated the break up. Instead of a logical split of the equipment business from operating. They decided to keep the cash cows as a part of AT&T.

Creating the RBOC was a great way to eliminate the capital intensive and lowest margin part of the business. WE had a lock on selling equipment at that time to the RBOC and long distance was still very profitable. AT&T execs felt that they could still control the U.S. telecom market while expanding its grip into computers and the international market. Green went along with it and we had the Modified Final Judgement detailing the first break up of AT&T.

What we are witnessing here are market forces at work eliminating the inefficiencies caused by the MFJ. The creation of LATA and other artificial barriers was a joke. So who cares if we end up with two former RBOC that end up as strong regional carriers. Technology will give consumers choice. CLEC, MSO, and what we today call wireless carriers (Sprint-Nextel, T-Mobile, etc.) plus a new breed of fixed wirless providers will offer alternatives. Watch out for Sprint-Nextel. They have the potential to steal away a significant amount of voice services from Verizon and SBC.
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