SBC to buy AT&T for $16 billion

Jessica Hall and Tom Johnson

NEW YORK: SBC Communications Inc. has reached a tentative deal to buy AT&T Corp. for about $16 billion, aiming to bolster its services for large corporations and end "Ma Bell's" independence, sources familiar with the situation said.

SBC's board has approved the no-premium deal while AT&T's board was still weighing it on Sunday, one source said. A formal agreement could be announced as early as Monday, barring any last-minute problems, sources said.

The combined company would have around $71 billion in revenues, the same as top U.S. telecom Verizon Communications Inc. A merger would likely face antitrust hurdles.

SBC's acquisition of the No. 1 long-distance carrier would include around $14.7 billion in SBC stock and a $1.04 billion special dividend to be paid by AT&T to its shareholders when the deal closes, according to one source familiar with the deal.

SBC will issue about 0.78 of its shares for each AT&T share, valuing AT&T at $18.40 a share, a source close to the deal said. AT&T will then pay a special dividend of around $1.30 a share, the source said. Combined the deal would value AT&T at about $19.70 a share -- no premium to its closing stock price on Friday.

Spokesmen for SBC and AT&T declined to comment.

The deal has already drawn criticism from analysts, who slammed $16 billion as too expensive for a company that has shrinking revenues and questionable growth prospects.

"AT&T's business doesn't seem that accretive or value added," said Greg Gorbatenko, an analyst with Marquis Investment Research. "We believe AT&T will be cheaper in the future, since long-distance underpinnings are still weak."

THE NEXT TARGET

An acquisition of AT&T would immediately shift attention to MCI as the next takeover target, analysts said. MCI is the No. 2 long-distance company.

"It would definitely put MCI on the block and it would be acquired quickly by one of the other Bells, Verizon or BellSouth or Qwest," Jeff Kagan, an independent telecommunications analyst, said in an e-mail.

A takeover of the two largest long-distance carriers has been seen by industry executives as inevitable as the Baby Bells try to expand their mix of services. But the timing seems premature, analysts said.

SBC would be smarter to focus on its faster growing wireless and data services than taking on the challenge of the difficult integration of AT&T, reducing its overall revenue growth, and risking exposure to the shrinking corporate long-distance market, Lehman Brothers analyst Blake Bath said in a research report.

AT&T shares closed on Friday at $19.71, up 11 cents, giving it a market capitalization of $15.7 billion. SBC closed down 0.2 percent at $23.62, valuing the company at $78 billion.

BABY BELL RETURNS HOME

A combination of AT&T and SBC would reunite a "Baby Bell" with its former parent -- a union former Federal Communications Commission chief Reed Hundt deemed "unthinkable" in 1997.

For SBC Chairman Ed Whitacre, a voracious purchaser of companies during his 15-year tenure at the helm of Texas company, buying AT&T would complete a transformation of SBC from a regional, local telephone company into an international force.

"With this move, SBC would be elevated above the other Baby Bells with national business services," Kagan said.

The merged company would likely keep the famous AT&T moniker since it's a recognizable brand, one source said.

Whitacre is slated to be chairman and chief executive officer of the combined company, while AT&T's CEO David Dorman would serve as president, one source said. Dorman and two other AT&T executives would serve on the combined company's board of directors, the source said.

AT&T, whose history dates back 130 years to the invention of the telephone, has been slammed by increasing competition from SBC and other dominant local carriers. The company held unsuccessful merger talks with BellSouth Corp. in 2003, but the Baby Bell walked away after seeing AT&T's revenue and growth potential shrink.

(Additional reporting by Caroline Humer in New York and Justin Hyde in Washington)