US telecom firms in $61bn deal

CONSOLIDATION in the American telephone companies entered a new orbit yesterday following an announcement from SBC Communications that has agreed to acquire Ameritech Corp for about $61bn (pounds 37bn), making it the biggest merger ever in the industry and the second biggest in all corporate history.

The deal, which is certain to provoke intense scrutiny from regulators in Washington, marks the next phase in the transformation of SBC from one of the seven Baby Bells created after the 1984 break-up of the old AT&T to a domestic telephone powerhouse stretching from Detroit to Los Angeles and Houston.

It will also send seismic ripples through the entire industry. The size of the deal is such that it even eclipses the $37bn that WorldCom is proposing to pay for MCI Communications, which at one time was destined to fall into British Telecom's hands until that transaction fell to pieces.

More broadly, the price being offered by SBC means this should measure up as the second largest merger ever between corporations after the $73bn proposed marriage between Citicorp and Travelers Corp that was unveiled just last month.

SBC has established itself as a predator with a voracious appetite. After existing since 1984 as Southwestern Bell, covering states like Texas, Oklahoma and Missouri, it expanded its base exponentially last year with the $16.5bn purchase of Pacific Telesis, gaining California and Nevada. Earlier this year it also swallowed Connecticut-based Southern New England Telecommunications for $4.4bn.

With yesterday's announcement, SBC will stand accused of trying to reverse the break-up of the old bell system to establish a new domestic monopoly. Such criticism was fended off, however, by Ed Whitacre, the SBC Chairman.

"The Bell system had national monopoly," he insisted. "This merger talks about 12 states, not 50."

However, the new company, to be called SBC, would serve customers in the top 50 US telephone markets. For these reasons, most analysts did not expect the deal to go through smoothly and certainly not in the 12- month window set by Mr Whitacre yesterday. Reflecting a cautious reaction on Wall Street, shares in SBC fell $2.626 in morning trading.Ameritech, the principal phone company for the Midwest, rose $3.25 to $47.125.

The deal may also give pause to champions of telecom deregulation on Capitol Hill in Washington, who surely never foresaw that the rampant consolidation of the last several months, which has also included the combination of Nynex and Bell Atlantic on the East Coast, would turn out to be the principle result.

"I don't think there is any question there will be a firestorm from regulators, consumer groups, long-distance carriers ... arguing that the Telecom Act was not intended to put Humpty Dumpty back together again," said Scott Wright, an analyst with Fahnestock & Co in New York.

Pressure will now intensify on the other phone companies to find new partners of their own, including the new AT&T which until now has remain aloof from the marrying frenzy. Criticising SBC's move, AT&T said yesterday the deal "creates no local competition and delivers no consumer benefits".

In an ironic twist, however, AT&T was itself the subject of speculation last year that it was about to get into bed with SBC. Observers predict AT&T will be forced to find an alliance with another of the remaining Baby Bells. An AT&T marriage with the new Bell Atlantic would be the most dramatic of possible combinations.