SBC Communications and AT&T agree to US$16bn deal

31 Jan 2005

It has emerged this morning that US carrier SBC Communications has agreed to buy its former parent AT&T for US$16bn. The deal has been rumoured for over a week and executives were yesterday locked in discussions. The deal will create the largest telecommunications company in the US.

It is understood the deal will be financed with US$15bn worth of shares as well as a special US$1bn dividend paid to AT&T shareholders.

The deal effectively marks the end of AT&T, which was founded in 1875 by Alexander Graham Bell. It is understood that cost savings at SBC and AT&T were a major driver for the merger. The companies expect annual cost savings of at least US$2bn from 2008 onwards.

The deal that is subject to regulatory and shareholder approvals is expected to be complete by the first half of 2006. AT&T is a long-distance telecommunications firm while SBC is mainly focused on the local market in the western part of the US. Both companies also have strong data networking businesses.

Under the agreement, AT&T investors will receive 0.78 SBC shares for each of their AT&T shares. They will also get a special dividend payment of US$1.30 per share. The deal is subject to approval by AT&T’s shareholders and regulators.

A takeover of AT&T by SBC would mark another chapter in the reshaping of the US telecoms industry, which began early last year when Cingular Wireless, a joint venture between SBC and BellSouth, agreed to buy AT&T Wireless for US$41bn. In December, Nextel and Sprint agreed to merge in a US$36bn deal.

AT&T, an iconic name in US business, has long been considered a shadow of its former self and a potential takeover target in the industry, along with MCI Communications, the heir of WorldCom, which last year emerged from bankruptcy. By buying AT&T, SBC would add a large corporate telecoms business to its strong presence across different telephone services, including wireless.

Fierce competition in the US telecoms market has forced AT&T’s revenues downward in recent years and to reflect its former parent’s struggles, SBC’s offer is barely 2pc more than AT&T’s US$15.7bn market value.

Seven firms, called Baby Bells, were split off from AT&T in 1984. However, following mergers and acquisitions, only three remain.

By John Kennedy