WASHINGTON-The fanfare surrounding last week’s government approval of Cingular Wireless L.L.C.’s $41 billion acquisition of AT&T Wireless Services Inc. proved to be short-lived, with Moody’s Investors Service reacting immediately by downgrading long-term debt ratings of the new No. 1 U.S. mobile-phone carrier and its two parent Bell telephone companies.
Following conditional approvals of the merger by the Justice Department and Federal Communications Commission-which required modest wireless divestitures in more than a dozen spectrum-concentrated markets-Moody’s painted a sober picture of the risks, challenges and opportunities for stakeholders in a mobile-phone merger of historic proportions.
Pointing to wireline competitive pressures, network upgrade costs and potential wireless merger snags, Moody’s called the ratings outlook negative for SBC Communications Inc. (60-percent owner of Cingular) and BellSouth Corp. (40-percent owner of Cingular). Moody’s said the ratings outlook for Cingular and AT&T Wireless is stable.
The “integration of AT&T Wireless into Cingular may prove more difficult, expensive and time consuming than expected, and when coupled with the service requirements associated with Cingular’s assumption of AT&T Wireless’ debt, will lead to lower earnings and distributions to SBC and BellSouth than currently anticipated by the companies,” Moody’s stated.
The strategic priority SBC and BellSouth attach to Cingular Wireless-reflected in the record price they paid for AT&T Wireless-makes it more likely the two parent companies will have to support Cingular in the future, according to Moody’s.
At the same time, Moody’s said the ratings outlook for Cingular reflects its view that the post-merger wireless carrier’s size and scale “will significantly enhance its competitive position.”
Indeed, this is the $41 billion bet of SBC and BellSouth executives, whose landline telephone businesses are under attack by wireless, Internet and other disruptive technologies. Growing wireless via the AT&T Wireless merger is arguably a necessary hedge for SBC and BellSouth. Whether the two regional Bell firms can make it pay off is another question.
The two regional Bells are pinning their hopes on Stan Sigman, who will remain president and chief executive officer of Cingular.
“From the start, we have seen deep synergies between our two companies-in compatible technologies, operations and systems; rich histories of product innovation; and more importantly, a management team with unmatched wireless experience,” said Sigman. “We have taken some of the best talent from both companies and brought them together to drive the next wave of innovation and growth in the wireless industry.”
On paper, the value and rationale of the merger are self evident. AT&T Wireless gives Cingular more spectrum and improved coverage throughout the United States. The merged entity starts off serving more than 47.6 million subscribers, with a presence in 49 of the 50 states, including all of the top 100 metropolitan areas.
Realizing the efficiencies of the merger amid the tumult and confusion of combining the No. 2 and No. 3 carriers-whose embrace of GSM technology is a common denominator-will require skill, patience and resources. The next three-to-six months could be key. Any major slipups and Verizon Wireless, now the No. 2 carrier but only close to 6 million subscribers behind Cingular, will capitalize on its signature service offering.
In addition to administrative, business and technical challenges of combining two national wireless operators, Cingular faces competitive pressures in the evolving third-generation wireless market from Verizon Wireless and other national service providers. Third-generation wireless networks will require significant capital outlays from operators, a reality that could complicate Cingular’s business plans if lower long-term debt ratings make borrowing money costlier for the carrier and its two Bell parent companies.
If the anticipated synergies from the merger are not achieved, Moody’s predicts trouble. “Cingular’s ratings could fall if it experiences a sustained loss in subscribers, if meaningful cost savings fail to materialize and EBITDA margins do not rebound to levels consistent with market leaders, or if the ratio of free cash flow-to-debt falls below 10 percent,” Moody’s stated.
For now, Cingular is taking a positive view of events and promising benefits across the board.
“It’s a new day for wireless customers in America. We are committed to improving the wireless experience and giving customers the coverage, the phones, the capabilities and the call clarity they deserve,”said Sigman. “We are also committed to expanding our high-speed third generation services to the ever-growing community of mobile data users. And Cingular is laying the foundation to enable rural carriers to bring 3G services to rural America.”
During merger reviews by the Justice Department and FCC, Cingular made a bold commitment to bring 3G services to rural areas of the country. The commitment helped assuage concerns raised during the merger review that rural consumers and rural wireless carriers could be hurt by the merger, but the promise could prove costly.
Rounding out the new Cingular’s leadership team are Ralph de la Vega, who continues at his current post of chief operating officer; Pete Ritcher, chief financial officer; Thaddeus Arroyo, chief information officer; Rick Bradley, executive vice president of human resources; and Marc Lefar, chief marketing officer.
Cingular will continue to be headquartered in Atlanta.
In the end, federal policy-makers said the benefits of the merger outweighed the risks to consumers and competition.
“Today’s action by the department ensures that consumers of mobile wireless services will continue to benefit from competition,” said R. Hewitt Pate, assistant attorney general of the Justice’s antitrust division. “Without these divestitures, wireless customers in these markets would have had fewer choices for their wireless telephone service and faced the risk of higher prices, lower quality service, and fewer choices for the newest high-speed mobile wireless data services.”
While Justice negotiated an antitrust settlement with Cingular requiring the sale of wireless properties in 13 markets, the FCC went a bit further, calling for divestitures or ownership changes in 22 markets. The FCC also prohibited Cingular from bidding at Auction No. 58 next year on wireless licenses in markets in which the mobile-phone operator controls or has a 10 percent or greater interest in 70 megahertz or more of cellular-PCS spectrum.
The FCC also required Cingular and T-Mobile USA Inc. to unwind their joint venture, while consenting to a long-term arrangement whereby Cingular will lease spectrum to T-Mobile in Los Angeles, San Francisco and New York to assist the transition of Cingular’s customers off the joint-venture networks.
The government’s blessing of the merger-the first among the six national wireless carriers-was anticlimactic, but not devoid of controversy or precedent.
Two Democratic commissioners on the GOP-controlled FCC said the agency could have done more to protect consumers and competition.
“I must dissent to those parts of the order relating to the intermodal aspects of the merger… because of the increased potential for discrimination by the merged entities’ wireline parent companies and also because I find the lack of rigorous competitive analysis troubling,” said FCC Commissioner Michael Copps.
Fellow FCC Democrat Jonathan Adelstein agreed, saying the FCC gave Cingular a “pass” on wireless-wireline intermodal competition issues.
Justice’s settlement with Cingular and the FCC’s 107-page ruling together provide a baseline of sorts for future major wireless merger review. It was the first merger since the FCC’s spectrum cap disappeared in January 2003. Some experts have said the next large wireless merger will be more difficult to complete and any subsequent one possibly unthinkable.
A leading consumer group blasted governmental approval of the Cingular-AT&T Wireless merger.
Mark Cooper, director of research at the Consumer Federation of America, said, “No matter how you cut it, this merger is anti-competitive. In major cities across the nation, such as Dallas, Orlando, San Francisco, Memphis, Indianapolis, and New Orleans, this merger will allow the dominant local phone company to control 40 percent or more of wireless customers, in markets where they also control 90 percent of residential wireline customers.”
Cooper added: “This merger will have a devastating impact on consumers, who may have to pay more and may not receive the same level of service they currently enjoy. It also will gut the incentive for these companies to come out with new and innovative products and services.”
Japan’s NTT DoCoMo holds a 16-percent stake in AT&T Wireless. As such, as a result of the merger, DoCoMo will receive $15 per share, or $6.5 billion in cash.
