CINGULAR TO PAY $41 BILLION FOR AT&T WIRELESS IN ALL-CASH DEAL

Cingular won a heated bidding war for AT&T Wireless early Tues. morning, beating out Vodafone with an all-cash offer. The companies said shortly before 5 a.m. the boards of AT&T Wireless and Cingular had blessed a merger proposal that will give AT&T Wireless shareholders $15 in cash per share. The combined company would have 46 million customers, surpassing Verizon Wireless’s 38 million. Cingular said the combined company would have coverage in 97 of the top 100 markets. Cingular will assume $6 billion in AT&T Wireless debt.

Besides its sheer scope, the expected acquisition of AT&T Wireless has been watched closely as the first major wireless merger since the FCC lifted the spectrum cap. As a legal matter, the Commission is expected to view transactions in the context of a national wireless market, sources said (CD Jan 23 p1). As part of a basic antitrust analysis, the FCC is expected to examine wireless mergers from both a national and a local perspective, including a national market in the context of certain product offerings and from both a national and local perspective in terms of geographic areas.

“This acquisition will result in a more efficient competitor in an already competitive marketplace,” Sigman told investors. The deal would move the wireless market from 6 to 5 national players, keeping 2 or 3 regional carriers in many markets. “We think we can put forth a fair and reasonable position that there should be no divestitures considered. It’s not the consolidation, in our view, that in fairness would require divestitures, but we would have to put that before the appropriate parties,” he told reporters.

Possible Divestitures Eyed

Although there’s some risk of local divestitures, Legg Mason predicted the deal ultimately would receive regulatory approval. The markets where AT&T Wireless and Cingular hold the original A- and B-block cellular license are likely to receive the closest regulatory scrutiny, the firm said. There are 6 of these in the top 50 metro areas: Dallas, Jacksonville, Miami, Oklahoma City, Orlando, San Antonio. Legg Mason also raised the possibility the Justice Dept. or the FCC may consider, especially in SBC and BellSouth markets, “whether the importance of bundling wireline and wireless services is such that where the merging wireless companies are too dominant, some divestitures or other constraints on the companies are necessary.”

From a regulatory perspective, a Vodafone matchup would have been less complicated than a Cingular deal, said Precursor Group analyst Scott Cleland. “Cingular is classic horizontal consolidation with one less competitor,” he said, bringing the Number 2 and Number 3 wireless carriers together. Cleland said he saw a “high likelihood” of approval for the deal: “The question will be the possibility but not the likelihood of divestitures.”

The regulatory implications of the AT&T Wireless deal apparently shaped negotiations over the weekend. Legg Mason said in a research note it appeared AT&T Wireless initially turned down the Cingular offer in favor of Vodafone in part because of regulatory issues. Those concerns haven’t been disclosed by the firms, “but it may have dealt in part with potential divestitures and Cingular’s unwillingness to provide certain guarantees in case the deal was not approved,” Legg Mason said. On conference calls with investors and reporters Tues., Cingular and AT&T Wireless officials were repeatedly pressed on this point and whether safeguards were built into the deal in case regulators required certain divestitures. AT&T Wireless Chmn. John Zeglis said the break-up fee “was pretty standard” and that no additional fees were added in case of regulatory problems.

“Logical areas” where regulators may examine divestitures would include areas where the original A- and B- block cellular licenses would be brought under one owner, said Schwab Washington Research Group “I don’t think there’s a magic market share number,” Glenchur said. “The regulators are going to be interested in these markets where the incumbents are pretty strong and could be stronger because of the combined wireless share.”

Sen. DeWine (R-Ohio), chmn. of the Senate Antitrust Subcommittee, and ranking Democrat Kohl (Wis.) said in a joint statement they would “closely monitor this deal and any subsequent transaction in this industry, to insure that millions of consumers who rely on cellphones continue to realize the benefits of a competitive marketplace.” This reaction was more muted than their take last week on the $66 billion Comcast bid for Disney, which they said could pose a “risk to competition in the marketplace of ideas” (CD Feb 12 p2). Of the proposed Cingular deal, they said: “It appears that the much anticipated consolidation in the wireless telephone industry is now underway.”

In what would be the largest all-cash deal in the U.S., Cingular expects to generate more than $1 billion in savings in operating expense and capital spending in 2006 as a result of the merger. Starting in 2007, the companies said they expect more than $2 billion in annual savings. The companies said SBC and BellSouth committed to funding Cingular for the all cash transaction. Cingular and AT&T Wireless said because both carriers use GSM, the network integration will bring “almost immediate improvement in coverage and call quality… Because of improved spectrum holdings, the new company should be able to accelerate its offering of advanced wireless data services and pave the way for high-speed third generation services in the future.” SBC and BellSouth said their respective equity stakes in Cingular will remain unchanged after the transaction. SBC holds 60% of the venture and BellSouth owns the rest. Management of Cingular would remain evenly split. Cingular Chief Financial Officer (CFO) Rick Lindner said the companies expect the deal to close in the 4th quarter.

Some are predicting a potentially tough battle from state regulators. Medley Global Advisors said in a note to investors that some states, such as Cal., have raised concerns about Cingular’s billing and ad practices and could exhort federal regulators to address such concerns. Conditions that states, consumer groups and possibly public safety groups could seek may include LNP improvement and E911 rollouts, Medley said. “State officials and consumer groups have some degree of leverage in the negotiating process and will probably remain vocal about their interests throughout the entire review process,” it said. Another source said it’s unclear that any state PUC would weigh in but said some state attorneys general may become involved.

Besides regulatory approvals, the deal still awaits approval from AT&T Wireless shareholders. Sigman said the combined company will keep the Cingular name and Atlanta hq, although he said it was possible AT&T Wireless’s Redmond, Wash., operations would remain intact. Zeglis confirmed he would depart when the transition to the merged company is complete. “You don’t need 2 CEOs,” he said. Sigman said the merger would take advantage of Cingular’s strength in the consumer market and AT&T Wireless’s strength among business customers. Zeglis said the proposal caps a bid process that AT&T Wireless announced 3 weeks ago. “This company is going to see a lot of companies in its rear view mirror,” he said. “Hey Verizon, can you hear us now?”

While company officials touted the consumer benefits of the merger, including the rollout of advanced wireless services such as 3G, Consumers Union (CU) raised concerns. “This deal is a lose-lose proposition for consumers,” said CU Legislative Counsel Chris Murray. With wireless local number portability (LNP), which began in the top 100 markets in Nov., cellphone companies have started to offer better price deals, he said. “A move toward greater consolidation cuts at the heart of this growing competition in the telephone marketplace. We can expect to see fewer deals and higher prices, just as we've seen with the merger of cable companies.” CU said the merged companies, owned by SBC and BellSouth, “will be able to offer a bundle of services that virtually no other company can compete with in their territories -- combining wireless, local and long distance telephone and even broadband Internet services.”

New Bell Company Debt

The CFOs of SBC and BellSouth told investors Tues. the debt their companies would take on to buy AT&T Wireless should be retired in about 5 years. SBC CFO Randall Stephenson said his company’s 60% share of the purchase price came to about $21 billion because AT&T Wireless is expected to have about $5 billion in cash on hand at closing. SBC has cash on hand of about $5 billion and expects free cash flow before the deal closes of $2 billion, he said. Planned sales of SBC assets could bring in $1-$4 billion, he said. In all, SBC is likely to be left with about $10-$13 billion that would need to be financed, Stephenson said. “We are very confident in our ability to readily finance this amount while maintaining very strong credit metrics,” he said. “We estimate BellSouth will contribute about $15 billion for its 40% share,” said BellSouth CFO Ron Dykes. This would come from a mix of existing cash generated from operations before the deal closes and the possible sale of some non-strategic assets, he said. Domestic wireless now makes up about 22% of normalized revenue for BellSouth but that’s expected to reach the mid 30% range when the deal is complete, he said.

Standard & Poor’s placed the ratings of SBC, BellSouth and Cingular on CreditWatch with negative implications, citing the debt load from the acquisition. The rating agency also plans to evaluate the impact on the companies’ business risk profiles, she said. “Given that there will still be 5 major national wireless players after this transaction, industry competition and pricing pressures may not be markedly reduced from this combination.

Bell competitors raised concerns Tues. about how the 2 Bell companies can pay cash for a wireless company but not invest in broadband. “In the same breath that the Bells are whining that they cannot afford to deploy broadband without regulatory relief, they've amassed $41 billion in cash and chose to purchase a wireless company,” said AT&T Gen. Counsel Jim Cicconi. The deal should be a “wake-up call to regulators” that the Bells aren’t being “bled dry” by UNE-P, he said.

CompTel/ASCENT CEO Russell Frisby called the price tag of the proposed transaction “extraordinary.” He said: “This acquisition clearly dispels the myth perpetrated by the 2 companies and their fellow Bell monopolists that the regulatory ‘burden’ imposed on them through the competitive provisions of the ‘96 Telecom Act is responsible for impoverishing the companies.”