WIRELESS BUY MAY INSPIRE MA BELL SEQUEL

In the most impressive display of Bell company wealth in recent memory, SBC Communications and BellSouth put their money where Cingular Wireless' mouth was, pledging to fund their wireless joint venture's $41 billion all-cash acquisition of AT&T Wireless — thus entering the record books for the largest cash merger in U.S. history.

“One of the key points of this acquisition is that it's being made from a strong cash position,” said Stan Sigman, president and CEO of Cingular Wireless. When the deal closes at the end of this year, the Bell company partners actually will have to fork over about $36 billion (the $41 billion price tag, less AT&T Wireless' available cash of $5 billion). SBC, which owns 60% of Cingular, will contribute $21 billion, while 40% partner BellSouth will lighten its wallet by $15 billion.

The deal will result in the largest U.S. wireless carrier, serving 46 million subscribers and 97 of the top 100 markets, but the more significant figures relate to the increase in wireless revenue that SBC and BellSouth expect.

SBC's percentage of revenue from wireless operations will increase from 19% to 32%, according to Randall Stephenson, executive vice president and CFO of SBC. Meanwhile, BellSouth's wireless income “will go from 22% now to the mid-30s after the transaction,” said Ron Dykes, CFO of BellSouth.

The increasing reliance on wireless properties will provide a revenue boost that both companies need — and other telcos are looking for — as many continue suffering steady declines in access line revenue, stemming in no small part from the societal trend of “cutting the cord.”

Bundling wireline and wireless services has been the initial answer to these declines, and more direct ties between telcos and mobile carriers will be the next step, said Rajeev Chand, senior equity research analyst for wireless technologies at Rutberg & Co. “We're now seeing the bifurcated trends of wireline/wireless bundling, and wireless operations getting combined with wireline,” he said.

Though SBC and BellSouth sponsoring Cingular's deal isn't the same thing as a direct acquisition by the Bell company partners, several analysts saw the acquisition as a much more cozy arrangement. “It proves that Cingular has never been anything more than the front man for two of the strongest Baby Bells who, faced with shrinking revenues from their local exchange businesses, are transforming themselves into a new communications entity,” said Matt Vartabedian, research manager for enterprise wireless and mobile at iGillottResearch.

But that new entity bears striking resemblance to the old Bell system. “SBC, in particular, has already repackaged most of the wireline west of the Mississippi,” said Jack Dicton, principal with Mill Creek Consultants and a long-time employee of AT&T during the Bell System years. “In acquiring more wireless, it looks like they are trying to be the second coming of Ma Bell.”

Other industry watchers echoed that sentiment. Some, including Dicton, suggested that larger multiservice firms with stronger profit margins will improve the industry's overall economic health. Proponents of competition and consumer action groups might recoil at the possibility of such behemoths, but analysts said competitive choice lives on in wireless.

“People can say they are trying to re-create the Bell system, but the fact is there are still too many wireless providers,” said Will Stofega, senior research analyst at IDC Consulting. “With wireline voice margins declining, you could argue [telcos] have to do this to stay in business.”

For wireless carriers, industry consolidation will improve the financial health of the remaining players. Independently operated carriers such as AT&T Wireless and Nextel Communications (as well as foreign-owned T-Mobile) are not only hurt by cut-throat wireless pricing, but also by large operating expenses, such as access line fees.

“Independent wireless companies have to pay access costs to telcos, and that can be pretty expensive if they're not aligned with wireline companies,” Stofega said.

Despite the appearance that Bell company motivations might have driven the acquisition of AT&T Wireless, Cingular insisted last week that the deal was all about creating a national mobile carrier with superior coverage that is equally adept at serving both residential customers and the increasingly important enterprise market.

“Cingular already has a strong consumer customer base, and AT&T is strong with business users,” Sigman said. “AT&T Wireless has relationships with 97% of the Fortune 100, and 70% of the Fortune 500.” For Cingular's part, Sigman claimed the company led all U.S. carriers in 2003 with a 60% increase in revenue from mobile data services over 2002.

“We can play off the strengths of both companies in serving one another's customers,” said Alex Moraitis, vice president of data sales at Cingular Wireless. “Cingular brings a strong data play with applications like mobile gaming, and AT&T brings a strong voice element.”

Internally, integrating the companies could take a while. In addition to the internal systems integration, there are likely to be job cuts, vendor contract postponements and an intensive assessment of infrastructure overlaps from market to market. The latter, while taking much time and effort, also will allow the new Cingular to save capital expense in the long run by using redundant infrastructure from some markets to fill coverage gaps that exist in others.

However, with the acquisition closing at the end of this year by Cingular's estimate, it's expected none of this work will begin until 2005. “For now, it's going to be business as usual,” Moraitis said.

Both the Department of Justice and the Federal Communications Commission must approve the acquisition, but if comparisons to the old Bell system are being raised now, no one seems to think it will hurt the deal's chances of being approved.

“I think [FCC Chairman Michael] Powell would have raised a flag already if that were the case,” Dicton said.

Rumors circulated last week that AT&T Wireless nearly accepted an alternate acquisition bid submitted by Vodafone, in part because of fears of the regulatory restrictions that could be imposed on a Cingular/AT&T combination.

Analysts say it's likely the DOJ will demand its pound of flesh. This could mean a limited divestiture of properties in markets where the combined entity would dominate, according to Blair Levin, industry analyst at Legg Mason. Sigman said Cingular and its parent firms don't think divestitures are necessary and will fight any such recommendations.