Updated from 8:09 a.m. Shares of BellSouth ( BLS) surged Monday as Wall Street embraced its $67 billion acquisition by AT&T ( T). Shares caught a 13% bid as several analysts praised the combination. Sunday night, AT&T -- which itself was created last year through a mega-merger involving SBC -- agreed to acquire BellSouth for stock worth $37.09 a share, an 18% premium to Friday night's close of $31.46. In premarket trading, BellSouth rose $4.04 to $35.50. AT&T fell 24 cents to $27.75. The combined company will have a market capitalization of about $165 billion and annual revenue of more than $120 billion. Besides scale, a key advantage of the merger will be the unification of Cingular, the country's largest wireless operator that had been run as a joint venture between AT&T and BellSouth. Early Monday, AT&T said on a conference call it expected to cut about 10,000 jobs over three years in the deal, which will combine AT&T, BellSouth and Cingular under the AT&T brand. AT&T had pledged to cut 13,000 jobs in the tie-up of SBC and AT&T and an added 13,000 in a belt-tightening push, also over three years. "With 100% ownership of Cingular, we expect AT&T to truly operate as one company, developing integrated wireline/wireless services and price packages that will be tough for other wireless carriers to duplicate in its region," wrote Wachovia analysts Monday. "This could most hurt Verizon Wireless over the long term. While the current price paid for BLS may discourage VZ from counter bidding, we would not rule it out. VZ may also respond by acquiring other wireless and wireline assets, but it remains challenged by Vodafone." Wachovia upgraded AT&T to outperform and reiterated an outperform on BellSouth. The brokerage said the transaction should pass antitrust muster because the two companies have relatively few overlapping assets. Verizon owns Verizon Wireless through a joint venture with Vodafone ( VOD). Shares of Vodafone rose 6% early Monday as traders anticipated a countermove by its wireless partner. Analysts at Bear Stearns also praised AT&T's deal, estimating that the combined company will control 69 million access lines, including 39 million retail consumers, 24 million retail businesses, 6 million wholesale lines and 10 million digital subscriber lines. By comparison, Verizon has about 49 million lines. To view Lauren Silva's video take on today's deal,
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"Importantly, we believe over 50% of BellSouth's access lines are on loops under 5,000 feet, indicative of the company's deep fiber penetration in its local access network. As a result, we believe little additional capital spending is needed to enable lines for AT&T's Project Lightspeed for the majority of BellSouth's access lines." AT&T will exchange 1.325 shares of its common stock for each common share of BellSouth. Based on AT&T's Friday closing price of $27.99, that would equal a cash value of $37.09 for each BellSouth share, an 18% premium to BellSouth's $31.46 Friday closing price. The companies touted the benefits of having streamlined ownership and operations of Cingular. "The Cingular partnership and the company itself are performing extremely well, particularly after the AT&T Wireless acquisition," said AT&T Chairman and CEO Edward E. Whitacre. "But no partnership between two independent companies, no matter how well-run, can match the speed, effectiveness, responsiveness and efficiency of a solely owned company." The companies also said they expect the deal to create $2 billion in annual benefits in 2008, growing to $3 billion a year in 2010. Both companies' boards have signed off on the merger, which is expected to close within 12 months and is subject to regulatory scrutiny. AT&T expects the acquisition to have a neutral impact on its adjusted EPS in 2007. After that, the impact will be positive on adjusted EPS, although the adjusted measure excludes all merger integration costs and the non-cash amortization of intangible assets. San Antonio-based AT&T also expects that the merger will reinforce the guidance it provided at its analyst conference at the end of January. There is no change to the company's 2006 outlook, and AT&T continues to expect double-digit adjusted EPS growth in each of the next three years, with significant growth in free cash flow after dividends.
The merger should return AT&T's total revenue, including Cingular, to growth in 2007, a year earlier than previous guidance, according to the news release announcing the merger. AT&T also said its board had approved an expanded share repurchase plan of 400 million shares through 2008, replacing the existing program. Under this authorization, the company expects to buy back at least $10 billion of its common shares over the next 22 months. At least $2 billion of the repurchases will come in 2006, consistent with AT&T's previous guidance. Whitacre will be chairman, CEO and a member of the board of directors of the combined company. Duane Ackerman, the chairman and CEO of BellSouth, will serve as chairman and CEO of BellSouth's operations for an unspecified transition period following the merger. Additionally, three members of BellSouth's board of directors will join the AT&T board. AT&T will keep the merged company's headquarters at its San Antonio offices, although Cingular's headquarters will remain in Atlanta, as will the company's Southeast regional telephone headquarters.