AT&T Considers Its Next Move

 |  Includes: BLS, T
by: Yaser Anwar

Yesterday, FCC Commissioner McDowell announced he would not vote on the AT&T (NYSE:T) and BellSouth (BLS) deal. It was widely expected that McDowell would cast the tie-breaking vote to approve the deal. Now it appears that an 06 approval is unlikely and AT&T will likely need to offer more concessions.

It is possible that AT&T could agree to the demands of the Democrats on the outstanding issues and we could have deal approval sometime in January, with the added complications of hearings on Capitol Hill alongside the prospect of a final decision from District Court Judge Sullivan. Copps, Adelstein and Dingell have all suggested in the past that Chairman Martin should wait for the Judge to rule on the prior mergers, prior to an FCC vote on this one.

Wall Street does not believe either Copps or Adelstein intend to block the deal entirely, but rather to extract more meaningful concessions from AT&T. While AT&T has proposed concessions similar to that of the SBC/AT&T and Verizon/MCI mergers, Copps and Adelstein have suggested imposing conditions with respect to "net neutrality" and special access services.

I do not believe that AT&T is prepared to agree to any permanent conditions on the vaguely defined issue of "net neutrality" beyond agreeing to reasonably refrain from manipulating traffic on consumer's high speed access services. Hence, AT&T could agree to special access demands, recognizing that the two biggest historic special access customers [legacy AT&T and MCI] are now owned by the two biggest suppliers [AT&T and Verizon (NYSE:VZ)].

The telecommunications business has been undergoing deregulation and change since the 90s, including the introduction of competition from cable providers and the entry of the local telecom providers into new markets. A spate of merger activity has reordered the telecom sector. In about a decade, the US wireline industry has shrunk to just two dominant players, AT&T Inc. [assuming its planned merger with BellSouth] and Verizon Communications, from 10 major entities.

Pricing pressure remains fierce across all telecom segments, including long distance, data, and wireless. To the extent that top line industry growth does not return, pricing could worsen as carriers fight each other for market share to gain scale. Investors should keep in mind the risk that the intensity of competition could increase beyond what is anticipated in our models, as distressed carriers restructure and re-emerge from bankruptcy.

AT&T recently announced it has approved a quarterly dividend increase to $0.355 per share vs. a previous $0.33 per share. T will also have greater financial flexibility to return cash to shareholders through dividends and share repurchase.

AT&T can continue to purchase additional companies to broaden its product offerings or improve upon synergy opportunities to create margin expansion through scale. A significant sized acquisition could provide an overhang and/or risk for the share price and/or the valuation, depending on the circumstances of the transaction.

T 1-yr chart