AT&T Deal Wins A Key Go-Ahead

The Justice Department yesterday endorsed AT&T Inc.'s proposed$78.5 billion purchase of BellSouth Corp., clearing the way for theFederal Communications Commission to approve as early as this weekthe creation of a corporate giant that would be the country'slargest provider of telephone, wireless and broadband services.

But the outcome of the FCC consideration, scheduled for tomorrowmorning, remains in doubt because the prospective swing vote on thefive-member board has maintained since summer that he is sitting outthe case to avoid a possible conflict of interest.

The merger, proposed in March, would reunite two major parts ofthe old AT&T telecommunications empire that was broken up by thefederal government in 1984. The deal would also give AT&T completecontrol over Cingular Wireless, the country's largest cellulartelephone provider, now owned jointly by AT&T and BellSouth.

The deal, originally valued at $67 billion, is now worthsubstantially more because of increases in stock prices.

While consumer advocates say the merger would lead to higherprices for a range of telecommunications services, the companieshave argued it would foster greater innovation.

If the FCC's newest commissioner, Robert M. McDowell, isultimately recused, this could leave the board split along partylines and deny the merger the majority required for approval. Thatwould put pressure on Chairman Kevin J. Martin, a Republican, tooffer some concessions on consumer protection and competition thatthe panel's two Democratic members have sought but he has beenreluctant to make. Martin has previously urged that the deal beapproved without conditions.

Though a Republican appointee, McDowell has already shown anindependent streak and said he is recusing himself because hepreviously worked as senior vice president for Comptel, anassociation that has lobbied on behalf of companies competing withAT&T and BellSouth. A spokeswoman in his office said yesterday thatMcDowell has continued to act as if he is recused.

But the final decision on whether he will participate could restwith the FCC's general counsel, raising the prospect that McDowellcould be called on to decide the matter, even though he has said hehas intentionally steered clear even of reviewing writtensubmissions in the case. McDowell has never said publicly how hewould vote if forced to participate, but industry analysts speculatehe would likely side with his fellow Republicans.

Martin, saying little in public about the standoff, has signaledonly that it remains unresolved.

Late yesterday, the commission announced that formalconsideration of the merger, originally scheduled for today, wouldbe delayed until Friday. Though no explanation was given, sourcesclose to the FCC said negotiations between the two sides on thecommission had only begun in recent days, leaving it unprepared totake up the matter as quickly as first envisioned. The sources spokeon condition of anonymity because they are not authorized to speakpublicly on the matter.

By approving the merger, a step industry analysts expected, theJustice Department gave additional ammunition to advocates of thedeal. The department concluded that there are enough other corporatecompetitors and emerging technologies to ensure that consumers areprotected, and it placed no conditions on the approval.

"After thoroughly investigating AT&T's proposed acquisition ofBellSouth, the antitrust division determined that the proposedtransaction is not likely to reduce competition substantially," saidAssistant Attorney General Thomas O. Barnett. The ruling came afterthe antitrust division examined the areas in which AT&T andBellSouth now compete, including local and long-distance telephoneservice and Internet service for homes and businesses, he said. Theimpact on future competition in wireless Internet service was alsoconsidered.

Both AT&T and BellSouth hailed the ruling and said they lookedforward to a swift FCC endorsement.

"This unequivocal and unconditional approval underscores thecompetitive nature of our industry and the pro-competitive benefitsof this merger," said AT&T General Counsel James D. Ellis. "AT&T isfocused on bringing more video choices and next-generation broadbandservices to as many consumers and possible, and our merger withBellSouth will help deliver these benefits to more consumers, morequickly."

By issuing approval without any of the conditions it imposed onprior mergers, the Justice Department made it more likely that someFCC members will try to impose restrictions, said Rebecca Arbogast,a telecommunications analyst with Stifel, Nicolaus & Co. In otherrecent mergers, the department called for the divestiture of specialaccess lines -- which carry data from buildings to the phonecompanies -- so competitors would have the chance to handle thisbusiness.

Hours after the Justice Department ruling, DemocraticCommissioner Jonathan S. Adelstein vowed to press for consumersafeguards. "Since Justice dropped the ball, it's incumbent on us todo their job as well as our own," he said.

Last year, with the FCC split evenly among Republicans andDemocrats, the commission imposed modest conditions in approving apair of high-profile mergers -- AT&T with SBC Communications Inc.and Verizon Communications Inc. with MCI Inc. Among them wererequirements that the rates for special access lines be temporarilyfrozen, that DSL connections be sold separate from telephone serviceand that the companies temporarily abide by "net neutrality"principles allowing customers to use their broadband for anyapplication they want.

Arbogast suggested the commissioners would be hard-pressed tobreak with this precedent in approving AT&T's purchase of BellSouth.

"The most likely outcome is that the FCC ultimately ends upimposing conditions on this merger that are similar to theconditions imposed in earlier ones," she said. "The question is howlong it takes the two Democrats and the two Republicans to come tosome agreement." She predicted that the two sides would work out acompromise without McDowell having to participate against his will.

Consumer advocates, who sharply criticized the Justice Departmentdecision, warned that AT&T's purchase of BellSouth would inflateprices while suffocating innovation by setting up a single companythat dominates regional markets and faces only token opposition frompotential competitors.

"Justice has thoroughly abandoned the theory of promoting maximumtelecommunications competition," said Gene Kimmelman, senior vicepresident of the Consumers Union. Though he acknowledged that themerger would likely move ahead, he urged the FCC to require thecompanies to divest enough of their airwave spectrum to allowcompetitors to offer wireless broadband services.