The biggest U.S. phone company may need to make hefty concessions to win approval for the BellSouth takeover. So, what's on the table?
If only the feds had waited a day. It was Oct. 11, one day before the Federal Communications Commission was set to decide whether to approve AT&T's $67 billion acquisition of BellSouth. All the Justice Dept. had to do was let the FCC make the first move. Then it could let the deal sail through and move on.
Instead, Justice gave AT&T (T) the go-ahead to buy BellSouth (BLS) with no strings attached. No assets to sell off, no agreements not to raise prices—none of the things Uncle Sam is able to demand of merging companies to ensure they don't get too big or trample on competitors or customers.
The condition-free approval didn't sit well with consumer advocates, including Consumers Union and Consumer Federation of America. And it left the FCC—which had been scheduled to vote on the deal on Oct. 12—in a bit of a bind. "The FCC now has to be the guardian of public interest," says Ben Scott, policy director at Free Press, a group that aims to democratize media policy debates (see BusinessWeek.com, 3/6/06, "AT&T Rings a Familiar Bell").
It's not that AT&T's planned takeover of BellSouth is in jeopardy in any way. But the turn of events delayed the FCC vote at least by a day, if not longer, and touched off a round of maneuvering among FCC Chairman Kevin Martin, his commissioners, and executives at AT&T that's likely to force AT&T to make compromises aimed at assuaging consumers' and politicos' concerns. "[Martin] has extraordinary political savvy, and I have no doubt he will get to a compromise," says Harold Furchtgott-Roth, a former FCC commissioner with whom Martin started his telecommunications career in the late 1990s as a legal adviser. But it won't be easy.
Just after the Justice decision was announced on Oct. 11, the FCC said it was postponing its own discussion of the deal—originally set for Oct. 12—for a day. The decision could come on Oct. 13, though many analysts say approval could now take several weeks.
That wouldn't be a surprise, considering the task at hand. Martin and fellow Republican commissioner Deborah Tate are expected to support the deal. Not so commissioners Jonathan Adelstein and Michael Copps, both Democrats. "With the lights off at the Justice Dept., it becomes all the more important for the FCC to ensure that consumer interests have a seat at the table," Copps said in an Oct. 11 statement. The fifth commissioner, Republican Robert McDowell, may not vote at all, considering he was once a lobbyist with COMPTEL, a telecommunications association that represents AT&T's competitors.
CRAFTING A COMPROMISE.
COMPTEL is a party to a lawsuit filed in the U.S. District Court for the District of Columbia alleging that the AT&T-SBC and Verizon-MCI mergers, which have already occurred, would lead to antitrust violations and are not in the public interest. The lawsuit was updated with the Justice press release on the AT&T-BellSouth case on Oct. 12. "COMPTEL is deeply disappointed that the Department of Justice has completely abdicated its responsibility to protect the public and competition by enforcing the antitrust laws of the U.S.," the group said on Oct. 11. "It is now up to the FCC to protect the public, and COMPTEL hopes they take their responsibility more seriously."
More likely, to appease the Democrats and win merger approval, Martin will need to craft a compromise, imposing certain conditions similar to those the FCC forced on SBC when it bought AT&T and Verizon (VZ) at the time it bought MCI. In those cases, the FCC asked the telcos to promise not to increase rates paid by wholesalers and certain existing customers for two years or longer. The same worries—that the merged AT&T-BellSouth giant will squash alternative service providers and jack up rates—lie at the heart of the FCC's merger approval quandary.
"THEIR POUND OF FLESH."
AT&T said on Oct. 12 that it would make concessions. "We are working toward a 4-0 vote for approval [Oct. 13]," says Mike Balmoris, an AT&T spokesman. "We fully expect it would have some reasonable conditions attached to get approval." To gain approval, AT&T might have to agree to a price freeze on high-capacity business lines, a $15 billion business. The combined company might also have to change how it bundles services such as digital subscriber lines (DSL), letting customers who are not also local-phone customers purchase DSL, for example (see BusinessWeek.com, 9/13/06, "AT&T's Faulty New Connection—Broadband?"). "I don't think AT&T is going to give away the farm here, but it's possible that the Dems will be able to extract their pound of flesh," says David Kaut, regulatory analyst, at Stifel Nicolaus & Co.
Another area where AT&T may need to compromise: fees for Web companies that provide content via AT&T's connections. AT&T may need to agree not to charge some companies higher rates for priority service. "There is a possibility that this could be a landmark set of statements that are made," says Jeff Pulver, an expert in Internet-based call technology. "But whatever sound bites come out of this meeting, I don't believe that anything substantial will happen. I understand [Martin] to be someone who always gets what he wants." And right now, Martin wants this merger to be approved, fast and with as few conditions as possible.