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SBC dials up Ameritech
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May 11, 1998: 4:19 p.m. ET
In "national-local" approach to phone biz, Baby Bells unveil $62B mega-deal
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NEW YORK (CNNfn) - Extending its local service empire and laying the groundwork for a push into long-distance, West Coast phone giant SBC Communications Inc. said Monday it will buy Chicago-based Ameritech Corp. for $62 billion in stock, the second-largest merger in U.S. history.
The leading force behind a recent wave of consolidation in the local phone business, San Antonio, Tex.-based SBC now stretches into the Midwest and brings under one roof three of the seven so-called "Baby Bells" that were once part of phone monopoly AT&T 14 years ago.
And in a unprecedented move, SBC unveiled plans to use the merger as a springboard into the local phone business of 30 major metropolitan U.S. markets - including New York, Denver, Phoenix and Atlanta - where SBC and Ameritech now lack a presence.
If combined today, SBC and Ameritech would provide phone service in just 20 of the 50 largest metro markets in the United States.
"This transaction … will transform us from a regional company to a new kind of company that uses its premiere networks to focus on 'national-local' and global markets," SBC Chairman and Chief Executive Officer Edward Whitacre Jr. Said in a statement Monday.
News of the merger drew swift attacks from numerous competitors, including AT&T, as well as consumer advocates who claimed the deal would reduce competition and raise rates.
Consumer groups cry foul
"What they're doing is combining local telephone monopolies from the Rio Grande all the way to the Great Lakes plus California," Gene Kimmelman, co-director of the Consumers Union Washington office, said. "These are markets that have not been opened to competition."
"We are asking the Justice Department to step in and block this," Kimmelman added.
Other critics said by combining the two companies, SBC and Ameritech were trying to rebuild the old "Ma Bell". However, SBC and Ameritech executives said the have no plans to reconstruct the AT&T of yore.
"We will provide a competitive, integrated mix of local, long distance, Internet and high-speed data services, providing more choices, new and improved services, more competitive prices and more convenience for millions of consumers," Whitacre said.
A 'Viagra' for competition
Added Richard Notebaert, chairman and CEO of Ameritech, in a conference call with reporters Monday: "I like to think of this as a Viagra for competition."
Despite those assurances, the merger is likely to face a grilling from regulators, consumers and the long-distance companies that want to crack the local markets SBC dominates.
"I think this is going to get close scrutiny," said Robert Wilkes, a telecom analyst with Brown Brothers Harriman. "This raises the bar as far as the nervousness [about regulatory approval] the companies should be feeling right now."
AT&T, for its part, came out swinging at the SBC-Ameritech deal - insisting the market is far from competitive enough for such a deal yet.
Analysts said an SBC-Ameritech deal, which would shrink the number of Baby Bells to four, could step up pressure on AT&T or other Baby Bells to find partners in the rapidly-consolidating telecom industry.
Bruce Roberts, a telecom analyst with SBC Warburg, said the combined company will have greater cash flow than AT&T and would leave it poised for even more acquisitions (242K WAV) or (243K AIFF).
Angling for long-distance … eventually
Despite SBC's plans, getting into the lucrative long-distance market may still be elusive. Efforts by all of the regional Bells - including Ameritech and SBC - to tap that market have so far fallen flat.
The Telecommunications Act of 1996 requires Baby Bells to open their local, near-monopolized phone markets to competition before they can get into long-distance.
Federal regulators haven't yet given their OK, despite the legal wrangling from the Baby Bells.
"The Telecommunications Act of 1996 helped open the door to a period of rapid change in the telecommunications industry," said Notebaert. "But so far, it has not created the level of competition that many expected."
SBC executives know they're not allowed into long-distance, but they are looking to jump in when the flood gates open. Analysts generally believe it is more a question of when - not if - the Baby Bells that will happen.
The new industry by-word: Link up
Among the Baby Bells, only Bell Atlantic Corp., which bought northeastern neighbor NYNEX for $23 billion in 1996, has chosen the acquisition route.
Denver-based U S West Communcations Group and Atlanta-based BellSouth Corp. have chosen to go it alone - so far.
Originally a Texas-based Baby Bell, SBC vaulted onto the merger front by buying Pacific Telesis Group, the California-Nevada Baby Bell, in a $16.5 billion deal last year.
SBC is also digesting a $5 billion buyout of Southern New England Telecommunications Corp. of Connecticut.
And among all phone companies, the SBC-Ameritech deal dwarfs WorldCom's pending $37 billion merger with MCI Communications Corp., which was the largest corporate buyout ever just six months ago. Since then, Travelers Group and Citicorp agreed to a $67.7 billion merger.
Analysts have hinted the telecom deal looks like an effort to "remake Ma Bell" - or AT&T before the break-up. Whitacre slammed that idea during a Monday conference call with reporters.
"It's not like we are putting the Bell system back together," he said. "This is no monopoly, there is no long-distance involved."
Vince Farrell, chief investment officer at Spears, Benzak Salomon & Farrell, said SBC will have to do more than just piece together local phone companies to please investors.
"I'm not sure how productive it is to just keep putting local, local, local back together again," he said "Unless you get the long-distances in the next step, you're not going to be able to offer services to corporate America, which is where the real profits are."
By the numbers …
As part of the deal, Ameritech will be keep its name and will still be run regionally by Notebaert as its chairman and CEO. The headquarters will stay in Chicago and will oversee operations in the five states of Illinois, Indiana, Michigan, Ohio, and Wisconsin.
Insisting its savings will come through growth rather than job cuts, SBC said it is committed to maintaining the number of jobs Ameritech's five-state home region.
The deal is expected to be completed within the next twelve months, pending regulatory approval, and will be accounted for as a pooling of interests.
Ameritech shareholders will receive 1.316 SBC shares for each Ameritech share. Based on late afternoon trading Monday, that would value each Ameritech share at about $51.65.
On Monday, shares of SBC (SBC) were down 3-11/16 to 38-11/16. Ameritech shares (AIT) rose 1-9/16 to 45-7/16.
In a conference call, officials said the deal is expected to reduce earnings over the next couple of years but turn positive by the third year.
SBC said the dilution will be about 7 percent in the first year and 3 percent in the second year.
However, the company said it expects to see about $2.5 billion in savings but did not identify areas where the savings may occur. No job cuts are expected.
The companies said they will divest certain cellular properties since federal law prohibits ownership of overlapping licenses.
The new SBC would have about 57 million phone lines, or about a third of the nation's total lines.
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