Why AT&T Is Acquiring BellSouth -- Key Quotes From The T/BLS Conference Call

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Includes: BLS, T
by: SA Editors

In AT&T and BellSouth's merger call with analysts yesterday, AT&T executives addressed the drivers of the deal. Blake Bath from Lehman Brothers concludes that the real drivers of the deal are the desire to own wireless and rationalize costs:

Blake Bath, Lehman Brothers

Good morning. I guess two questions. Randall, if we could build a little bit on the conversation we had out in San Francisco a couple of weeks ago. The Company has stated it expects to be the industry leader in wireless across a range of metrics by 2008. I wonder if you have a similar view with respect to wireline and directories? And if you do, when do you expect to achieve industry leading metrics there and how you’re going to define that?

As a corollary to that, I’m a little confused why a part of the rationalization for the deal is wired and wireless convergence, and the ability to leverage the directories assets. There aren’t bigger revenue synergies as part of the deal, is that just conservatism?[...]

Randall Stephenson, AT&T COO

I will pass these around and I will talk about your first question, Blake, in terms of when you look at putting all these companies together — BellSouth and AT&T and Cingular. Industry leading metrics, it gets harder and harder to compare to the industry. The industry — what is the industry? So when you get on the consumer side its Comcast and its Time Warner. Are we going to get to their metrics if you will, 40% EBITDA margins. It is kind of hard to say.

I think when you look at the traditional wireline industry we should be a leader in the key metrics within the next two or three years if we execute on all the synergy objectives that we have laid out. That is one of the keys, is to basically be best in class in cost structure. So I think in the next two or three years we should be at the top of the industry when you look at traditional wireline companies, but that term is getting less and less relevant. Now you have got Nextel Sprint. You’ve got Comcast and Time Warner, I just think that is a harder comparison to make and everybody is in different segments of this industry. So in terms of revenue synergies, Jim, do you want to talk?

Jim Kahan, AT&T VP Corporate Development

I think, Blake, a couple of observations. One is our experience is that revenue synergies are harder to obtain and track than expense synergies, so that is the first point. Second is we are conservative. We think we have nothing in our assumptions about new products and services across the three screens as a result of integration of the networks, for example.

I think our assumptions are pretty conservative on legacy data products, and in moving the AT&T enterprise products not just to small and medium-sized businesses in BellSouth’s territory, but also large corporations in BellSouth’s territory; offering them integrated global services from a single entity. So in conclusion, I would just tell you that it is just part of our conservative nature to base these acquisitions on numbers that management feels highly confident that we can achieve.

Randall Stephenson, AT&T COO

That is really the satisfaction you take from these mergers, is the synergies. The $18 billion as outlined are really hard, they are mechanical in nature type synergies. You know exactly which strings you go pull and how to make those come to pass and you’re not banking on a lot of revenue upside to make the transaction economics work.

Blake Bath, Lehman Brothers

So at the end of the day, it sounds like what really drove this is the cost side and the desire to own 100% of wireless, as opposed to a dramatic change in the industry vision about the significant growing importance of wired and wireless convergence and the ability to leverage the directory assets?

Jim Kahan, AT&T VP Corporate Development

I think strategically that second point is very important, but it is obviously not something that is going to happen in 2006. It is going to take a while to as the two networks evolve to pure IP networks. I think that is part of the strategy, but in the near-term most of the synergies are coming from the expense side, from just blocking and tackling things that we know how to do and things we have done before. That is not to underestimate the longer-term synergy of the integration of these networks.

See the full conference call transcript -- right here on Seeking Alpha, of course.

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