AT&T and BellSouth Talk Merger

Code-named Brazil, the talks may be aimed at giving Ma Bell and the former piece of its old system the heft to rival SBC and Verizon

This may be the final act for AT&T. BusinessWeek has learned that CEO Mike Armstrong has proposed a "merger of equals" with BellSouth. Sources familiar with the deal say AT&T dispatched President David Dorman in mid-September with the offer: AT&T would first spin off its cable-TV unit, then merge its remaining telecom businesses with BellSouth. CEO Duane Ackerman is interested if the price is right, the sources say.

The value of the deal and who would take over management are up in the air. The talks, code-named "Brazil," could fall apart at any time, or another suitor could emerge. But AT&T wants to seal the deal by the end of October, according to the sources. Neither company will comment on the proposal.

After AT&T spins off its cable unit, it will have a market cap of $30 billion to $40 billion -- compared with BellSouth's $79 billion. That would make the "merger of equals" Armstrong envisages difficult. AT&T spun off its wireless unit earlier this year. Comcast is offering $35 billion for cable, but Armstrong is seeking bids from others such as AOL Time Warner.


  The deal with BellSouth would reunite AT&T with a big piece of the old Bell system, which it spun off in a 1984 court-ordered breakup. Former Federal Communications Commission Chairman Reed Hundt said in 1997, when AT&T was considering merging with SBC Communications, that such a deal was "unthinkable." But a lot has changed. The telecom industry is in a deep recession that has eroded AT&T's position. The current FCC is also more receptive to industry consolidation.

There are obstacles. BellSouth is barred by law from offering long-distance service in its nine-state local-phone territory in the South. AT&T is confident the deal could be approved with conditions. The Telecom Act bars BellSouth from owning large stakes in cable. That's one reason AT&T is keen to sell its unit.

The deal makes strategic sense. Neither BellSouth nor AT&T have the scale to match SBC and Verizon, the strongest players in U.S. telecom. The deal would catapult BellSouth to the forefront of the long-distance pack and -- more important make it a leading presence in services for big businesses.

But merger is no panacea. AT&T has lots of operational problems. Whoever ends up running it will have plenty of work to do.

By Steve Rosenbush in New York