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AT&T Rings a Familiar Bell

In a historic move, AT&T (T) announced a deal late Sunday to swallow BellSouth (BLS), one of the country's two remaining regional bell telephone companies, for about $67 billion. The combination nearly reestablishes ol' Ma Bell, the nickname AT&T assumed in the 1980s when it broke off into regional Baby Bells such as BellSouth in the Southeast and Pacific Bell in the West.

The deal makes AT&T, which had been SBC Communications until it acquired long-distance provider AT&T last fall and assumed the AT&T brand, an even bigger force in the telecom world. Together, AT&T and BellSouth would have a telephone and data network that stretches from Connecticut to California, serving both residential consumers and hundreds of coveted business customers. Perhaps most importantly for AT&T CEO Edward Whitacre, the deal pushes his company even further ahead of telecom rival Verizon Communications (VZ), the country's second largest telecom service.

AT&T and BellSouth have combined revenues of more than $120 billion, while Verizon sits at about $90 billion. The deal "will improve our ability to provide innovative services to more customers while returning substantial value to our owners and improving our growth profile," Whitacre said in a statement.

ANTITRUST CONCERNS. The most significant hurdle for the deal is winning approval from government regulators. AT&T needs a sign-off from antitrust authorities at the Justice Dept., officials at the Federal Communications Commission, and local regulators in BellSouth's nine-state territory.

Regulators may be queasy that yet another major telephone company is disappearing, leaving only AT&T, Verizon, and the much-smaller Qwest Communications International (Q). The concern could be that AT&T is eliminating a possible competitor in BellSouth, one that could offer rival services to consumers and businesses, says Ben Silverman, a telecom analyst with the independent investment newsletter

AT&T already offers some competing services in BellSouth's territory. It sells long distance service to consumers, as well as local service in some regions, in direct competition with the regional Bell. For businesses, AT&T is a leading provider of everything from long distance to sophisticated data and Internet services. Regulators could require AT&T to sell off some of the local telephone lines in BellSouth's territory to ease antitrust concerns.

RAISING THE BAR. That would still leave Whitacre with the prize he really covets. In acquiring BellSouth, his outfit would assume 100% ownership of Cingular Wireless, a joint venture that is now 60% owned by AT&T and 40% owned by BellSouth. With wireless one of the few strong growth areas of in telecom these days, Whitacre has long wanted to own Cingular outright.

Simplifying the ownership structure will lead to more efficient marketing and service delivery. If the deal is approved, AT&T will likely drop the Cingular name and sell service under the AT&T brand. "No partnership between two independent companies, no matter how well run, can match the speed, effectiveness, responsiveness, and efficiency of a solely owned company," Whitacre said.

It only helps that BellSouth has been methodically building a network loaded with fiber. BellSouth has run fiber networks to more than 1 million homes, while another 5 million homes have fiber within 5,000 feet of the front door, according to company officials. That effort dovetails with AT&T's bid to remake itself into a next-generation telecom provider that offers not only phone service, but also broadband and even TV and wireless services. Fiber lines strung deep into neighborhoods are crucial to delivering these nifty offerings to customers. "They have a fiber-rich network," says AT&T spokesman Selim Bingol. "We see a big opportunity to leverage that for video and other services."

GROWING TOGETHER. Indeed, BellSouth Chief Executive F. Duane Ackerman has been content to watch as SBC and Verizon swallowed long distance companies that he contended would slow growth, cost billions to integrate, and dilute any acquirer's share of revenue from hot wireless and broadband services. BellSouth generated more than 40% of its $34 billion in 2005 revenue from Cingular wireless -- and invested billions to upgrade and expand its broadband network in fast-growing southeastern states such as North Carolina, Georgia, and Florida.

Some 85% of BellSouth's 14 million homes have access to high-speed Internet service. "We are positioning our assets where they can grow," Ackerman has said repeatedly in interviews.

Now those assets will try to grow under the AT&T umbrella. AT&T chief Whitacre says that the acquisition will generate substantial cost savings from consolidation of network operations, facilities, and traffic onto a single network. Synergies are expected to reach an annual run rate exceeding $2 billion in the second year after closing. The net present value of all the synergies is estimated at nearly $18 billion.

STILL SPENDING. Still, in acquiring BellSouth, AT&T is accumulating basic assets that are in serious decline. BellSouth, like AT&T and every other telecom service, has been losing lines to competitors such as the cable operators and wireless service providers. Hanging onto all of BellSouth's wired lines amounts to a substantial anchor sure to be a drag on growth.

That's why some Wall Street bankers have floated the idea that a private-equity consortium could snap up BellSouth's southeastern landlines and use them as the core of a massive roll-up of traditional phone service lines from other major telecom companies. Verizon has tried, unsuccessfully so far, to sell some landlines, while Arkansas-based AllTel (AT), a major rural telecom provider, plans to spin off its landline assets from its cellular unit this year.

The deal marks what could be the crowning achievement in the legacy of Whitacre. Before any of the other Bell execs, he went on a buying spree after the federal deregulation of 1996. He quickly bought Pacific Telesis in the West, and later Ameritech in the Midwest. He scooped up Southern New England Telecom, with operations in Connecticut, to establish a base near Verizon's prime territory. Many thought his deal for AT&T would be his last major acquisition before he steps down as chief executive, a move that's expected later this year. But Whitacre has surprised his investors and his few remaining competitors once again.

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