Justice Department approves AT&T-BellSouth merger plan

Thursday, October 12, 2006

WASHINGTON -- The Justice Department gave its unconditional approval to AT&T Inc.'s buyout of BellSouth Corp. on Wednesday, a coast-to-coast behemoth that would be the largest U.S. provider of telephone, wireless and broadband Internet services.

The decision cheered company executives but outraged consumer advocates and two members of the Federal Communications Commission. At first the FCC scheduled a vote for today on whether the $78.5 billion deal should go forward, but late Wednesday the agency pulled the item from the agenda and scheduled a commission meeting for Friday for a possible vote on the deal.

The FCC did not say why it was delaying a vote. "We are committed to evaluating merger applications fairly and in a manner consistent with the public interest," agency spokesman Clyde Ensslin said in a statement. "We are continuing to work to complete our AT&T and BellSouth merger review in a timely manner."

Despite the scale of the purchase, the Justice Department found no potentially adverse effects on competition.

The decision was immediately criticized by FCC member Jonathan S. Adelstein, a Democrat who called it "a reckless abandonment of DoJ's responsibility to protect competition and consumers."

Michael Copps, the commission's other Democrat, said the "Justice Department has packed its bags and walked out on consumers and small businesses by refusing to impose even a single condition in the largest telecom merger the nation has ever seen."

If the deal wins final government approval, the merger would give San Antonio-based AT&T Inc. total control over the nation's largest cellular provider, Cingular Wireless, a joint venture of the two companies that serves 57.3 million customers.

"After thoroughly investigating AT&T's proposed acquisition of BellSouth, the antitrust division determined that the proposed transaction is not likely to reduce competition substantially," said assistant attorney general Thomas O. Barnett. He heads the section that examines proposed mergers.

The department's approval "underscores the competitive nature of our industry and the pro-competitive benefits of this merger," AT&T general counsel James D. Ellis said in a statement.

"AT&T is focused on bringing more video choices and next-generation broadband services to as many consumers as possible, and our merger with BellSouth will help deliver these benefits to more consumers, more quickly," Ellis said.

BellSouth said in a statement that it looks forward to FCC approval "in the very near future."

Consumer advocates and some lawmakers claim the government is well on its way to reconstituting the old Ma Bell monopoly, which was broken up in 1984 after a lengthy court battle.

House Judiciary Committee Chairman Rep. James Sensenbrenner, R-Wis., and other members of Congress had asked that the deal be held up until a federal judge decided whether two previous telecommunications company mergers, which were challenged by the Justice Department, were in the public interest.

A message left at Sensenbrenner's office was not immediately returned on Wednesday.

When Verizon Communications Inc. bought MCI Inc. and SBC Communications Inc. bought the old incarnation of AT&T, which kept the name, the Justice Department sued to block the mergers, but entered settlement agreements with the companies the same day.

The agreements, called consent decrees, required the companies to sell off some of their assets in certain regions. A federal judge is mulling whether the decrees are in the best interest of the public.

In the AT&T-BellSouth merger, the department avoided judicial review altogether. The FCC's Adelstein said by taking that course, "it appears DoJ took a dive on one of the largest mergers in history just to avoid further court scrutiny."

A coalition of consumer groups said the approval was "a move likely to leave consumers with fewer choices and inflated prices for a host of services."

Barnett said Justice Department lawyers looked at all areas where AT&T and BellSouth currently compete, including local and long-distance phone and Internet service for residential and business customers. The department also examined the merger's impact on future competition for wireless broadband service.

He said the lawyers cited competition in the marketplace, changing regulatory rules and emerging technology in finding that the merger was unlikely to hurt consumers.

Instead, it "would likely result in cost savings and other efficiencies that should benefit consumers," Barnett said.

With the action moving to the FCC, a number of scenarios may play out. The FCC's chairman, Republican Kevin Martin, has circulated an order recommending approval. He probably will get support from commissioner Deborah Taylor Tate, also a Republican.

With Adelstein and Copps so critical of the merger, all eyes will be on Robert McDowell, the third Republican on the commission.

McDowell's last job was as vice president and assistant general counsel for a trade association that has fought legislative and regulatory battles with AT&T and other major carriers.

McDowell's office reaffirmed Wednesday that he continues to proceed under the assumption that he will not participate in the vote. McDowell could be urged to vote on the deal if he were cleared to do so by the FCC's general counsel, Sam Feder. Feder declined comment.

FCC spokesman David Fiske said he is not aware whether an opinion on McDowell's withdrawal has been requested or filed.

In addition to the merger item, the FCC also moved to Friday a vote that would begin an agency inquiry into broadband industry practices. The session is expected to deal with whether Internet service providers should be forced to provide equal treatment to all traffic on their networks, a controversial issue called "network neutrality."

Complicating matters is a planned trip by Martin to China beginning next week.

Despite the strong language from Adelstein and Copps, there may be a way to come up with conditions to win their support for the merger.

The combination of San Antonio-based AT&T and Atlanta-based BellSouth would have operations in 22 states. AT&T estimates that about 10,000 jobs would be phased out over three years.

Combined, the companies generate $117 billion in revenue and operate 68.7 million local phone lines stretching coast to coast across the southern United States and up through the Midwest. The merged company would employ 309,000 people before any job cuts.

The deal would further the reunification of the Baby Bells. The seven regional telephone operating companies and one long-distance provider were spun off from the national AT&T monopoly under a federal court order designed to introduce competition.

Including BellSouth, the new AT&T would consist of four former Baby Bells and the long-distance business, which was acquired by the company late last year. The other two companies created from Bells are Verizon Communications Inc., which dominates the eastern United States, and Qwest Communications International Inc., the phone company for most of the Rocky Mountain and Northwest regions.

AT&T shares rose 19 cents, or 0.6 percent, to close Wednesday at $32.96 on the New York Stock Exchange. BellSouth shares rose 24 cents, or 0.6 percent, to $43.44.

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