SBC to buy AT&T for $16 billion

Cost savings seen paying for deal; brand name to survive

WASHINGTON (MarketWatch) -- SBC Communications Inc. has agreed to acquire its former parent AT&T Corp. in a $16 billion deal that could spell the end of one of the most storied companies in American business history.

By absorbing AT&T (T), San Antonio-based SBC (SBC) would become the nation's largest phone company by far, with tentacles reaching into every major segment of the U.S. communications market.

The deal could also put pressure on other large phone companies such as Verizon Communications (VZ) and BellSouth (BLS) to obtain their own long-distance networks, launching yet another round of big mergers that are radically reshaping the once-staid U.S. phone industry.

Although the deal will face heavy regulatory scrutiny, antitrust analysts believe it would be approved after a lengthy review. Indeed, SBC predicted the acquisition wouldn't close until the first half of 2006, indicating that executives believe the process could take up to a year and a half.

Under the terms of the deal, AT&T shareholders will receive SBC shares valued at about $15 billion, as well as another $1 billion in the form of a special dividend.

The agreement values AT&T at $19.71 a share, based on SBC's closing price last Friday, the companies said in an early Monday announcement.

SBC Chairman and Chief Executive Edward Whitacre Jr., 63, would remain in his current position, while AT&T CEO David Dorman, 51, would become president. AT&T would get three seats on the new company's board, including one for Dorman.

The telecom giants have been in talks for days. News of the deal was first reported by the Wall Street Journal. Read the story at WSJ.com.

Filling a hole

SBC was the smallest of the seven local "Baby Bell" phone companies created in 1984 when the U.S. government broke up the old AT&T monopoly. Yet through a series of acquisitions, SBC has turned itself into a national giant, with leading positions in virtually every market.

The one area where the company has struggled is in the corporate-services market, long the domain of AT&T, MCI (MCIP) and to a lesser extent, Sprint (FON). By acquiring AT&T, SBC would gain 3 million business customers and leap into the No. 1 position in that market.

Because the AT&T brand is still quite powerful and famous around the world, the lesser known SBC is expected to retain the name.

"It's one of the premier brands in the world. That is going to factor into our decision," Whitacre said during a conference call with Wall Street analysts.

Still, the merger may be hard for SBC investors to swallow, at least in the near term. Under stiff competitive pressure, AT&T has seen its revenue tumble from a peak of $50 billion in 1999 to just $30 billion in 2004, with sales expected to fall another $5 billion over the next 12 months. And SBC said the acquisition won't begin to add to earnings until 2008.

SBC, however, predicted that the companies could save $15 billion by combining operations, paying off almost the entire purchase price. The company said it expects to generate $2 billion in annual savings starting in 2008.

For AT&T's beleaguered employees and investors, meanwhile, SBC becomes a "white knight," rescuing the company from a dreary future of ever-dwindling sales and profits. That's why shares of AT&T soared last Thursday when news of merger talks emerged.

Analysts say it's also possible that SBC could adopt the AT&T name as its own, giving the 120-year-old brand new life. Indeed, AT&T Chief Executive David Dorman pooh-poohed the notion that the merger meant the end of AT&T.

"From my point of view, this is the beginning of a new era," he said during a conference call.

Merger mania

Nonetheless, the sale of AT&T is likely to face sharp criticism from consumer groups and some lawmakers who are concerned about consolidation in the domestic phone industry.

In recent months, for example, Cingular Wireless has acquired AT&T Wireless and Sprint has announced plans to buy Nextel Communications (NXTL). In light of the merger frenzy, regulators can be expected to take a long look at a proposed SBC-AT&T combination. See full story.

If history follows form, a sale of AT&T could also trigger another buying spree as SBC rivals Verizon and BellSouth review whether they need to acquire a long-distance network.

Potential targets would include MCI Inc. (MCIP) and Qwest Communications International (Q) or smaller operators such as Level 3 Communications (LVLT).

Still, long-distance competition remains intense, and it could be a difficult market for companies such as SBC to master. At the same time, technological changes are radically reshaping the phone industry, while new competitors such as cable-television operators are hoping to make inroads in the market.

The move could pose other difficulties, too. By acquiring AT&T, SBC would put itself in direct competition with BellSouth, its partner in Cingular Wireless, the nation's largest wireless phone provider with 49 million customers. SBC holds 60 percent of Cingular, with BellSouth owning the rest.

SBC executives dismissed the notion of major problems with BellSouth, saying they'll be able to sell more Cingular wireless services to large corporate clients to the benefit of both companies.

"I don't think that relationship will be soured," said Whitacre, noting that the two companies already compete in some market segments.

On the financial front, SBC will also have to add significantly to its debtload - $26 billion at the end of 2004 - to pay for the AT&T purchase. And AT&T itself carries $6 billion in net debt. Just three months ago, Cingular spent $41 billion to buy AT&T Wireless, funded in large part by SBC.

Yet top SBC executives believe they need to serve every part of the communications market -- local phone, long-distance, Internet, wireless and even television service -- to be successful. The looming threat from cable has only exacerbated the company's concerns.

SBC now serves 36 million households in 13 states, including Texas and California. The company now has a market value of nearly $80 billion, dwarfing its former parent.

A shrunken AT&T is valued at just over $15.5 billion, far below its all-time high. Yet AT&T did generate lots of cash in 2004 -- $3.7 billion in so-called free cash flow -- mostly by jettisoning workers and taking other steps to slash costs.

Indeed, SBC said it can pay off the purchase price within a few years by further lowering costs and pocketing the large-if-dwindling amount of cash AT&T produces. Among other things, SBC would be expected to eliminate thousands of additional jobs.