AT&T reportedly seeks BellSouth merger

Reports that AT&T is seeking a merger with RBOC BellSouth may be true, but the idea that such a deal would be a “merger of equals” is unlikely, according to one analyst.

AT&T recently dispatched President David Dorman to propose a deal to BellSouth officials, according to Business Week. AT&T would like to merge the companies after spinning off its broadband unit and would like to reach an agreement by the end of October, the article states.

“I wouldn’t be surprised if they were talking; everybody’s talking to each other now,” said Patrick Comack, telecom analyst for Guzman & Co. “You’d have to be naïve to think that the LECs [like BellSouth] aren’t eventually going to consolidate with the IXCs.”

Although a BellSouth spokesman said the company does not comment on merger speculation, Comack said AT&T is a buyout target “on a lot people’s radar screens right now,” particularly those of RBOCs that want to tap AT&T’s base of large enterprise customers. Considering the fact that AT&T’s market cap is about half that of BellSouth’s, it’s hard to imagine the IXC forging a “merger of equals” with BellSouth or any other RBOC, Comack said.

“Believe me, the LEC will be the buyer at the end of the day,” he said.

For a long time, the idea of AT&T merging with one of its local-service offspring was considered impossible, because federal regulators would oppose a deal that would smack of re-creating the old Bell system.

But the regulatory environment has changed drastically in the last couple of years. AT&T’s long-distance arm is losing market share every time RBOCs are approved to offer long-distance service within their territories, and new FCC Chairman Michael Powell does not appear to be opposed to market-driven consolidation within the telecom industry.

In addition, there is a precedent for RBOCs getting at least an indirect hold on long-distance assets prior to getting Section 271 relief, Comack said. When the FCC approved the Verizon merger of Bell Atlantic and GTE, it said the newly merged company could regain Genuity—GTE’s Internet backbone—if it secured long-distance approvals in all 13 states in its territory.

“[Any RBOC] could pull a Genuity, although Genuity was not the real target in the Verizon merger—GTE was,” Comack said of potential deals with IXCs. “The FCC didn’t want to do the Genuity deal because it would set a dangerous precedent, but it’s out there now.”

BellSouth has been slow to gain long-distance approvals within its nine-state territory, as it has yet to be approved by the FCC in any state and has no applications pending before the commission.

However, BellSouth’s long-distance status is expected to change quickly, according to the BellSouth spokesman. Louisiana’s PUC recently blessed the RBOC’s 271 application in that state, and the Georgia PUC is scheduled to vote Tuesday on BellSouth’s long-distance future in that state. If the Georgia approval is secured, the RBOC plans to jointly file the Georgia and Louisiana applications with the FCC.

“We could be providing long distance in Georgia by January,” the BellSouth spokesman said.

Mississippi’s PUC is expected to vote on BellSouth’s 271 application next week, but that application likely will be forwarded to the FCC separately from the Louisiana and Georgia applications, the spokesman said.

Because BellSouth has just one network, the RBOC believes long-distance approvals will be granted rapidly after the FCC signs off on the first one in the territory. BellSouth plans to gain 271 approval for at least eight of its nine states—the exception being Florida, where negotiations with state regulators are still in limbo—within a year.

If BellSouth meets this schedule, it might not have to worry about coaxing a Genuity-like deal out of federal regulators, as it would be free to offer long-distance service by the time an AT&T merger could be completed, Comack said.

“You’ve got to figure a deal like this would take at least a year to complete,” he said.

BellSouth has an agreement with Qwest Communications to carry out-of-region voice and data traffic for large customers. BellSouth had owned 10% of Qwest—leading to long-term speculation that BellSouth and Qwest eventually might merge—but recently sold much of the Qwest stock to reduce its stake in the company to 4%.