Turning rumor into fact, SBC Communications Inc. reported a deal last week to acquire former parent company AT&T Corp. for $16 billion, creating a telecommunications provider with vast domestic and international wireline holdings, as well as a range of domestic wireless operations.
The deal, which was first mentioned late last month and is expected to close early next year, calls for AT&T shareholders to receive total consideration currently valued at $19.71 per share, including 0.78 shares of SBC common stock for each AT&T common share. In addition, AT&T said it will pay its shareholders a special dividend of $1.30 per share.
“We are combining AT&T’s national and global networks and expertise with SBC’s strong platforms and skills in local exchange service, wireless and broadband,” said Edward Whitacre Jr., chairman and chief executive officer of SBC. “It’s a great combination.”
SBC also owns 60 percent of the nation’s largest wireless operator, Cingular Wireless L.L.C., which late last year closed on a $41 billion acquisition of AT&T’s former wireless subsidiary, AT&T Wireless Services Inc. SBC noted that it has $26 billion in net debt excluding debt at Cingular.
The deal is also expected to impact AT&T’s wireless plans, which were to include the launch of a mobile virtual network operator service using Sprint PCS’ wireless network and the AT&T brand name the company is scheduled to receive back from Cingular later this year. AT&T Chairman David Dorman said the company still plans to launch a wireless service this year, but noted that he would welcome the opportunity to sell products from Cingular through the venture.
Cingular offers MVNO-based services with 7-Eleven Inc., as well as resells minutes through a number of outlets, including prepaid provider Tracfone Wireless Inc.
Analysts said they expect AT&T to forgo the MVNO relationship with Sprint PCS and instead launch service using Cingular’s network.
“It would just make sense for AT&T’s wireless initiative to use Cingular’s network,” said Bob Egan, founder of wireless industry consulting firm Mobile Competency. “I’m sure the folks at SBC are very interested in keeping as much business in-house as possible.”
Egan added that by keeping AT&T from using another carrier’s network, Cingular would benefit by reducing the potential for confusion in the market.
“Cingular has spent a lot of money trying to ease the branding transition for AT&T Wireless customers and to have an AT&T name thrown back into the wireless space-using a competitor’s network no less-would be detrimental to all of that work,” Egan said.
AT&T’s wireless business is also expected to benefit from the global-roaming capabilities of Cingular’s GSM network, which is important to AT&T’s core business customers and would be sorely lacking with Sprint PCS’ CDMA-based network. In addition, handset transitions will be eased as current AT&T business customers using the former AWS network in many cases would be able to keep their current handsets.
Analysts noted that the loss of AT&T’s MVNO business could have a short-term impact for Sprint on Wall Street, but the carrier’s long-term MVNO plans-rumored to include both wireline and cable providers-should dispel such concern.
SBC said it expects to yield a net present value of more than $15 billion in synergies from the acquisition, and that synergies could ramp up to a net annual run rate of $2 billion or more beginning in 2008. SBC added that nearly half of the total net synergies would come from network operations and information technology as facilities and operations are consolidated; 25 percent from the combined business services organizations as sales and support functions are combined; and the rest spread between eliminating duplicate corporate functions and increased revenues from migrating service offerings to new customer segments.
SBC also said it plans to cut 12,800 jobs following the acquisition of AT&T. The job cuts are expected to include 5,125 jobs as part of “network efficiencies,” 1,700 cuts from the combined sales department, 3,400 job cuts from business operations, and 2,600 job cuts from other periphery operations. SBC employs 163,000 people today, while AT&T claims 47,000 employees, though each company is expected to cut jobs prior to the acquisition’s closing next year.
Despite the proposed job cuts, SBC’s pending acquisition of AT&T garnered support from the International Brotherhood of Electrical Workers, which represents more than 12,500 workers at SBC and 900 employees at AT&T.
The deal also received positive reviews from a number of analysts, who echoed SBC’s synergistic cost-saving claims.
“The irony of a Baby Bell acquiring AT&T cannot be overlooked, but there is also a compelling logic at play here,” noted industry research firm Ovum. “AT&T is a long-distance and international company, SBC primarily a domestic and local business. Both are profitable, but having to fight hard in their respective markets. Join the two, cut out the overlaps and drive synergies, and bigger will make better.”
A report from TNS Telecoms noted that the combined entity would control 28 percent of wireline revenues, as well as 27 percent of the local telecom market households and 37 percent of the long-distance market households. The combined entity would also represent 15 percent of all dollars spent on telecom services compared with 16 percent from Verizon Communications Inc.
Consumer groups were not as thrilled, noting the deal will hurt consumer choice and decrease competition.
“For most consumers, the communications market is rapidly deteriorating into a duopoly dominated by two firms because of the failure of new entrants to gain a foothold in the market,” said Gene Kimmelman, Consumers Union senior director of public policy and advocacy. “Two companies are not enough to provide serious price competition or strong incentives to innovate.”
