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Baby Bell buying Ma Bell
SBC to buy former parent AT&T despite drop in long-distance business; analysts question $16B deal.
January 31, 2005: 11:13 AM EST
Alexander Graham Bell founded AT&T in 1877.
Alexander Graham Bell founded AT&T in 1877.

NEW YORK (CNN/Money) - After 128 years as an independent company, since just after the invention of the telephone that's the centerpiece of its business, AT&T will be absorbed into its offspring SBC Communications in a stock-and-cash deal valued at $16 billion.

SBC also will be assuming about $6 billion in AT&T's net debt, bringing the total value of the deal to $22 billion.

SBC (Research), announcing the deal Monday, said it could find value in AT&T (Research) even with the decline in its traditional long distance business. Shares of AT&T fell about 5.6 percent in early trading Monday morning while shares of SBC were down slightly.

The deal marks the end of several eras, one that started with company founder Alexander Graham Bell, and another that began when a federal judge split the original company into eight separate entities in 1984.

In the more than 20 years of telephone deregulation that followed, the offspring such as SBC moved into dominant positions in the growth areas of telecommunications, including wireless and Internet connections.

AT&T tried to change, as it entered fields such as cable television and wireless phone service itself. But its efforts generally met with business disappointment, and it soon left both those fields. SBC is already in the process of integrating the former AT&T Wireless unit it bought last year.

Still, AT&T chairman and CEO David Dorman said during a conference call with analysts Monday morning that he did not view the acquisition as an end to AT&T. "We don't view it that way and nothing could be further from the truth," he said.

SBC chairman and CEO Edward E. Whitacre Jr. added during the call that SBC was still contemplating whether or not it would continue to use the AT&T brand name once the deal was completed. "Obviously AT&T is a great name, a strong worldwide brand, and that will factor into our decision," Whitacre said.

Revenues on the decline

In April 2004, AT&T was dropped from the Dow Jones industrial average, signifying its lessening importance to the nation's economy. It was replaced by another so-called "Baby Bell," Verizon Communications (Research).

AT&T announced last July it was basically pulling out of the consumer long distance business that had been a core of its business since the court-ordered split-up of AT&T in 1984, and it took a $11.4 billion charge reflecting the reduced value of those assets in the third quarter last year.

By the end of 2004, it had dropped to 24 million consumer customers, down more than 30 percent over the previous 12 months. The business long distance service has been waning as well.

In fact, SBC's announcement of the deal barely mentions long distance service. It said it had made the deal with a conservative estimate for the future revenue stream from AT&T (Research).

"AT&T's revenues have declined over recent years as it has transitioned from a voice long distance business to an emphasis on business and data markets, and those declines are expected to continue," said the release. "At the same time, AT&T's next-generation IP and e-services revenues grew 11 percent in 2004."

SBC said the deal brings it access to AT&T major business customers, including virtually all of the Fortune 1,000, as well as AT&T worldwide telephone connections and its 26 advanced Internet Data Centers, 13 in the United States and 13 in other countries.

"This is a tremendous positive step forward for SBC," said Whitacre during the conference call. "This will accelerate our expansion in the enterprise space."

Besides local service, SBC holds a 60 percent ownership interest in Cingular Wireless, the nation's largest wireless phone provider, as well as the range of data, networking, e-business, directory publishing and advertising that is typical for the more successful Baby Bells. It argued in its release that AT&T's assets are a good fit into that business.

"The combination provides immediate global leadership in the enterprise segment where corporations and governments require complex communication solutions and services and access to advanced national and global networks," said SBC's release.

Analysts question deal

But some analysts last week questioned the wisdom of the early reports of the SBC-AT&T combination.

"I'm skeptical that enterprise customers are as attractive as Wall Street assumes," Patrick Brogan, assistant director of research for Precursor, an independent research firm focusing on telecom, media and tech, told CNN/Money on Jan. 27.

The deal provides no premium for AT&T shareholders from Friday's close, but shares were up about 7 percent since the first reports of the pending deal Jan. 27. Meanwhile SBC shares had fallen about 4 percent on those early reports.

While the deal is valued at $16 billion, SBC's contribution is stock worth just under $15 billion, as it gives AT&T shareholders get 0.77942 share of SBC for each of their shares. In addition, AT&T itself will pay a special dividend to its shareholders worth $1.30 a share, or just over $1 billion, at the time the deal is closed.

Still, some analysts question whether SBC is paying too much for AT&T, given the expectations that the former parent's revenue stream is likely to keep falling.

"Is SBC buying at the right price? That's the key. It could cost less to do a deal in a year," Jeff Kagan, an independent telecom analyst based in Atlanta, told CNN/Money last week.

Others said that AT&T shareholders should be pleased to find a buyer for the company, even if they're not seeing a premium at this time.

"A deal, for AT&T, makes sense because I really think they would get demolished during the next few years as a standalone company," Allan Tumolillo, chief operating officer of Probe Financial Associates, an independent telecom research firm, said last week.

The companies said they expect cost reductions available in the deal will equal or top $2 billion annual, with the full amount of savings being reached by 2008. It did not give an estimate on the number of jobs to be eliminated. SBC said it should see improved cash flow from the deal by 2007 and increases in earnings per share by 2008.

Executives said during the conference call that they expected that it would take about a year for the merger to close and that they did not anticipate that regulatory agencies in Washington would have problems with the deal.  Top of page

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