Sunday's news that AT&T ( T) will buy BellSouth ( BLS) marks a kind of telco homecoming, and a point of departure for BellSouth shareholders. My valuation model indicates that the dynamics of this deal make AT&T shares the ones to hold for the long term -- and that BellSouth holders should act now to preserve their premium. AT&T's prospects are far from unattractive and are only enhanced by the addition of BellSouth. These two telephone companies have led separate lives since 1984, when AT&T was split into eight regional phone companies known as the Baby Bells. In 1996, Congress passed the Telecommunications Act, which allows for consolidation among the Baby Bells and other telecom providers. The companies didn't hesitate to act, with AT&T and the former SBC making several purchases during the late 1990s. The telecom musical chairs started a fresh round with wireless companies entering the picture: SBC and BellSouth formed a joint venture for wireless operations, Cingular Wireless, in April 2000, with SBC taking a 60% stake. In 2002, AT&T shed its cable division, AT&T Broadband, selling it to Comcast ( CMCSA). Then, in 2004, Cingular Wireless outbid Vodafone ( VOD) for AT&T Wireless. In January 2005, SBC bought the remains of AT&T for $16 billion, and assumed the AT&T brand name. Finally, completing the long journey home, this weekend AT&T agreed to purchase BellSouth. Under the terms of the deal, BellSouth shareholders will receive 1.325 shares of AT&T stock for each share of BellSouth. Based on AT&T's March 3 closing price of $27.99, the exchange will equal $37.09 per BellSouth share, or a 17.9% premium over BellSouth's $31.46 March 3 closing price, which values the deal at approximately $67 billion. I have followed AT&T closely, as a member of a model portfolio, since July 11, 2005, when it traded at $23.70. It has been difficult to find stocks in the tech and telecom sectors that ValuEngine rates as buys, but both AT&T and BellSouth have buy ratings from the service. At Friday's close, AT&T was 18.2% undervalued, with fair value at $34.20, and BellSouth was only 2.7% undervalued, with fair value at $32.33. Therefore, at $37.09, BellSouth will be 14.7% overvalued.
Both AT&T and BellSouth have positive weekly chart profiles, and last Friday's closes for both stocks were well above the five-week modified moving averages at $26.25 and $29.46, respectively. BellSouth is also well above its quarterly pivot at $30.40, which indicates potential to my semiannual risky level at $41.16. Long-term owners of BellSouth should consider selling these shares, buying AT&T and locking in the premium, because this deal will take time to close; why take the chance that the regulators may not approve the deal, given the pressures that major consumer groups are likely to bring to bear? Before this deal, AT&T was already the nation's largest telecom-service provider. Growth has been evident among all its businesses, including wireless, broadband and business services. The company already is benefiting from the merger between AT&T and SBC, which will save the company $1.2 billion by 2008, and add 30 cents a share to 2008 earnings. AT&T expects the SBC merger to have a positive effect on earnings, even in 2007, a year ahead of previous forecasts. This should create a climate in which adding BellSouth would be relatively easy to integrate and complete. AT&T already has announced plans to gain market share as an Internet-access provider, recently reducing the introductory price for its high-speed DSL service to $12.99 from $14.95. AT&T added 1.8 million DSL connections in 2005 for a total of 6.9 million lines, which is the most of any U.S. DSL provider. This month, AT&T will launch its fiber-to-the-premises video service, Lightspeed, in 21 target cities. The service will offer 300 television channels, 45 music channels and video on demand. The success of this product is likely to be greatly enhanced longer term, given the demographics of BellSouth. Two weeks ago, AT&T laid out its 2006 plans to expand its global network, extending coverage in Europe, Africa, Asia, Latin America and the U.S. Its strategy will allow its network to reach 97% of the world's economy, and gives AT&T an edge in acquiring and retaining corporate customers that have business worldwide. AT&T will have access points in 150 countries, and according to media reports, expects to double its DSL business client base. Also, its enhanced satellite, WiFi and wireless applications should give it a solid base for revenue growth throughout the global economy. The synergies of BellSouth benefit this strategy, as the new Ma Bell expands into 22 states, and globally.