Justice Dept. Backs Verizon-MCI, SBC-AT&T Mergers, Requires Divestitures

Both deals remain subject to approval by the FCC, which set its vote for today (Fri). With international and most state approvals complete, Verizon expects to close its merger later this year or early in 2006. “Twenty states have approved the merger or are taking no further action and there are 11 states still pending,” a Verizon spokesperson said: “We expect most state approvals complete in November.” SBC/AT&T have approvals from 33 of 36 states with clearance processes, plus D.C. The firms said they expect reviews pending in Ariz., Cal. and Ohio to be completed this fall and the merger to close later this year.

The FCC at our deadline was expected to act today (Fri.) on the mergers, despite speculation of a postponement. “It all comes down to whether the Democrats [Comrs. Michael Copps and Jonathan Adelstein] will agree” to the draft orders, which now impose no conditions on at least one merger, a source said: “Otherwise, they [FCC] could delay the vote perhaps to the meeting next month” or Chmn. Martin could wait until the White House nominates and Congress confirms 2 Republican commissioners. That’s the “challenge” to the Democrats -- setting enough conditions to satisfy their concerns but not such that “Martin will say ‘forget it,'” the source said. Among issues being negotiated between Martin’s office and the Democrats are naked DSL, net neutrality, special access and UNE requirements, we're told.

“The FCC is pushing ahead to identify additional conditions it will impose,” Legg Mason said late Thurs.: “It is simply a question of whether the required deliberations and discussions can take place between now and the meeting scheduled for tomorrow, or whether it will slip over until next week.” Legg Mason said “the FCC is considering a broad range of conditions related primarily to special access, but [we] continue to believe there will be no merger requirement that the Bells reduce their special access rate or divest any facilities.”

DoJ approval “represents a very significant victory for the Bells,” Legg Mason said in a research note. Opponents can challenge the consent decrees under the Tunney Act for 60 days after publication in the Federal Register, but Legg Mason said “we believe there is no chance the court would overturn the settlement.” “The divestitures are an investment nonevent,” said Precursor CEO Scott Cleland: “They are like dust on the back of a mastodon. Times have surely changed. Just 9 years ago they [the mergers] would been… unthinkable, but now they've barely caused a ripple in Washington.”

“Today’s action by the Dept. ensures that business customers that provide or buy telecommunications services to locations in Verizon’s and SBC’s territories will continue to benefit from competition,” said Thomas Barnett, DoJ Antitrust Div. acting assistant attorney gen. He said his unit “thoroughly investigated” not only local private line issues covered by the settlements but “all areas in which the merging firms compete, including residential local and long distance service, Internet backbone services and a variety of telecommunications services provided to business customers.”

With the exception of cities addressed in the action, Barnett said, DoJ decided the deals won’t harm competition and “will likely benefit consumers due to existing competition, emerging technologies, the changing regulatory environment and exceptionally large merger- specific efficiencies.”

DoJ opted for the “lighter remedy” of requiring Verizon and SBC to sell or divest 10-year leases for loops into some buildings and for dark fiber transport connecting the loops to the facility of the IRU buyers, Legg Mason said. “This was the remedy that Verizon had been advocating for some time,” Legg Mason said.

“We proved that the transaction is pro-competitive and will not lessen competition in any market,” said Verizon Senior Vp-Deputy Gen. Counsel John Thorne: “The consent decree will result in no disruption to MCI customers.” SBC Senior Exec. Vp-Gen. Counsel James Ellis said DoJ’s decision “reflects a fair and impartial determination that, with these narrowly tailored conditions, the merger of SBC and AT&T will not harm competition.”

Consumers Union (CU) and Consumer Federation of America said DoJ approval signals “the end of national competition policy,” leading to “increasing or inflated prices” for local, long-distance, high-speed Internet and wireless service. “A Justice Department that 20 years ago shattered the telephone monopoly known as Ma Bell is now coddling the very phone giants who are again trying to create regional telecommunications monopolies,” said CU Senior Dir.-Public Policy Gene Kimmelman. The groups also said the mergers will “stymie the competition” of VoIP companies that use Internet connections to provide service.

After the mergers close, the firms will have 120 days to divest the facilities, with an option to request 60 more days to complete divestitures. The facilities in question will be sold by bid, overseen by the DoJ. It was unclear at our deadline who might bid.

DoJ filed civil suits in U.S. Dist. Court, D.C., to block the mergers as originally proposed. The suits were accompanied by consent decrees, if approved by the court, resolving DoJ competitive concerns and lawsuits, allowing the mergers to go forward. “The transactions, as originally proposed, would have resulted in higher prices for certain business customers in 8 metropolitan areas in Verizon’s franchised territory and 11 metropolitan areas in SBC’s franchised territory,” DoJ said. In other respects, it said “the transactions are likely to generate substantial efficiencies that should benefit consumers.”

DoJ said Verizon and MCI are the only 2 firms that own or control direct wireline connections to hundreds of buildings in the metro areas of Washington-Baltimore; Boston; N.Y.; Philadelphia; Tampa; Richmond, Va.; Providence, R.I.; and Portland, Me. Similarly, it said, SBC and AT&T are the only ones owning or controlling direct wireline connections to certain buildings in Chicago; Dallas-Ft. Worth; Detroit; Hartford-New Haven, Conn.; Indianapolis; Kansas City; L.A.; Milwaukee; San Diego; San Francisco-San Jose; and St. Louis. “In the absence of new entry, the merger[s] would eliminate competition for facilities-based local private line service to those buildings,” DoJ said. Those local private line connections are used to supply voice and data telecom services to business customers.

Meanwhile, SBC said it would adopt AT&T as its name, once the merger is completely, probably by late 2005. “The AT&T name has a proud and storied heritage as well as unparalleled recognition around the globe among both businesses and consumers,” said SBC Chmn. Edward Whitacre. “The AT&T brand is especially strong in the critical enterprise market” and has “almost universal awareness as a communications brand,” SBC said: “Internal research shows that in the United States, consumer awareness of the AT&T brand is 98% and business awareness is virtually 100%, while global awareness is nearly as high.” At merger close, SBC said the new company would unveil a new logo, which would be heavily promoted, and would announce its new stock market ticker symbol.