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Is AT&T Losing Enthusiasm For BellSouth Merger?

November 27, 2006

When it comes to the delays in getting the AT&T acquisition of BellSoth approved, Dave Burstein  of DSL Prime isn't one to follow conventional wisdom that acqurier AT&T's CEO Ed Whitacre is highly impatient that the deal has not yet passed final muster with the FCC.

Revealed in the edition of DSL Prime that is released this morning to subscribers, Dave feels that the rise in BellSouth stock since the deal was announced has pushed the transaction to a level where it stops making sense.

"$80B plus assuming $15B in debt is a very high price for a company that earned only $3B in 2005.," Dave writes. "Overpaying for BellSouth is the first fact Bernstein Research cites about AT&T. BellSouth earnings have been dropping for several years."

Dave feels there are understated culprits in dampening merger enthusiasm.


These are the facts that BellSouth's wireless and DSL income streams are "approaching saturation," and that contracted BellSouth emploee retirement costs can only get higher.

Altough Dave does not annotate the latter concern, he seems to be implying that these costs- which an acquiring company such as AT&T would have to bear- are only going to get larger over time as retirees age, and their health care costs rise over time due to their age and inflation.

Like most telcos, BellSouth retirement costs are probably understated and assets overstated. The key growth drivers - wireless and DSL - are approaching saturation over the next few years while landline losses continue. 

Dave also reads mixed feelings about the merger on Whitacre's part as the reason he did not accept compromises offered by Democratic FCC Commissioners Adelstein and Copps. In essence, Dave says that Whitacre was smart enough to know a Democratic takeover of Congress was coming, and that the fact he did not embrace the Democrat FCC Commissioner's concessions was, in fact, decided upon during a time when it started to become obvious that "some of AT&T favorite Congressman would lose."

In short, if Ed Whitacre cared about the deal so much, he should have jumped at the chance to get the deal approved before the November elections.

Now here is where I disagree with Dave.

Dave feels that as an old pro, Whitacre should have seen the oncoming Congressional power shift to a less AT&T-friendly Congressional majority.

I am not so sure. One thing Whitacre is is arrogant. Could the highly partisan Whitacre been so politically tone-deaf that he thought the marger-friendly Republicans would maintain control of the U.S. Senate and House?    

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