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FCC Approves AT&T's Buyout Of BellSouth

The Federal Communications Commission unanimously approved AT&T Inc.'s $86 billion buyout of BellSouth Corp. Friday, the day after the company offered a new slate of concessions for consumers and competitors.

The FCC's approval was the last major regulatory hurdle for the proposed deal, which is the largest telecommunications merger in U.S. history.

Lawyers for AT&T and the two Democratic commissioners who had opposed the merger, hammered out a compromise, the details of which were released Thursday night.

Among the conditions offered by AT&T is a promise to observe "network neutrality" principles, an offer of $19.95 per month stand-alone digital subscriber line service and a vow to divest some wireless spectrum.

The FCC's approval was the last major regulatory hurdle for the proposed deal, which is the largest telecommunications merger in U.S. history.

AT&T offered the concessions after a little more than a week of marathon negotiations with lawyers who work for the two Democrats on the commission, Michael Copps and Jonathan Adelstein.

Adelstein said Friday he was pleased with the agreement.

"We got substantial concessions that are going to mitigate a lot of the harms that would otherwise have resulted from this merger," he said.

The reaction from Commission Chairman Kevin Martin, however, was decidedly negative. The chairman found some conditions to be "unnecessary" and said that some "impose burdens that have nothing to do with the transaction, are discriminatory, and run contrary to commission policy and precedent."

Copps was cautiously optimistic, saying that the approval was "not a triumph for huge corporate mergers but a modest victory for American consumers." He added that he was not entirely satisfied with the compromise but believed it is "a genuine step forward" in several areas.

Consumer advocates had opposed the merger from the beginning, but put the best face on the compromise, especially on the issue of network neutrality, which can be loosely defined as the idea that all Internet traffic should be treated equally.

Mark Cooper, research director for the Consumer Federation of America said AT&T has pledged to protect "the free and open Internet." He called it a "win for the public" and said he will continue to work for federal legislation on network neutrality in the New Year.

The agreement came together 10 days after Republican Commissioner Robert McDowell announced that he would not vote, despite being authorized to do so by the FCC's general counsel. The buyout passed by a 4-0 vote with McDowell not participating.

McDowell, a Republican, had decided not to participate in the negotiations because of his former position as a lobbyist for Comptel, a trade organization that opposes the merger.

McDowell said in a statement Friday that he was "delighted that my colleagues and the merging companies were able to come to terms so quickly after last week's announcement."

Martin, who supported approval of the merger without conditions, had declared an impasse in the negotiations and was betting that McDowell would vote in favor of the deal break a 2-2 partisan deadlock.

But with McDowell's firm declaration that he would not vote, the pressure shifted to AT&T, which had hoped to close the transaction by the end of the year, a development that put the two Democrats in a much stronger position.

Adelstein said the agreement could have been completed a month ago were it not for the McDowell issue. "It turns out there was never an impasse after all," he said.

Under the agreement, BellSouth shareholders will receive 1.325 shares of AT&T stock for every share of BellSouth stock. In March, when the buyout was announced, it was valued at $67 billion. But thanks to a more than 25 percent increase in the value of AT&T's stock, the total is up to around $86 billion.

The Justice Department approved the merger on Oct. 11, but it attached no conditions, a move that prompted outrage among many Democrats.

In an effort to gain the support of Copps and Adelstein, AT&T submitted a set of concessions on Oct. 13, but they were rejected.

In AT&T's letter committing to the new conditions, the company's senior vice president in charge of regulatory affairs, Robert W. Quinn Jr., noted that the new concessions were "significantly more extensive than those submitted on Oct. 13."

The new offer extends the lifespan of many conditions from 30 months under the old deal to 42 months or longer in some cases.

Among the promises made by the company:

An offer of stand-alone, DSL Internet service to customers in its service area for $19.95 per month for 30 months. The "naked DSL (digital subscriber line)" offer would allow those who live in AT&T and BellSouth's service areas to sign up for fast Internet access without being required to buy a package of other services.

To cap rates for "special access" customers, usually competitors and large businesses that pay to connect directly to a regional phone company's central office via a dedicated fiber optic line, for 48 months.

To divest all of the 2.5 GHZ spectrum currently licensed to BellSouth within one year of the merger closing date.

To "repatriate" 3,000 jobs that were outsourced by BellSouth outside the U.S. by Dec. 31, 2008, with at least 200 of those jobs to be located in New Orleans.

The most difficult item in the negotiators was that of network neutrality.

AT&T had clearly drawn a line in the sand on the issue, and was not prepared to offer any promises that would not affect the telecommunications industry as a whole.

The company's position has been receiving generally positive reaction from proponents of the concept, but some skepticism from others, who are concerned with the wording of AT&T's commitment.

AT&T says it will "maintain a neutral network and neutral routing in its wireline broadband Internet access service" for two years and that it would not sell services to Internet content providers that "privileges, degrades or prioritizes" traffic over its wireline broadband service.

But it makes an exception to the company's Internet Protocol television service.

Martin is unconvinced the network neutrality provisions are necessary.

"The conditions regarding net neutrality have very little to do with the merger at hand and very well may cause greater problems than the speculative problems they seek to address," he wrote. "These conditions are simply not warranted by current market conditions and may deter facilities investment."

Meanwhile, Rep. John Dingell, D-Mich., incoming chairman of the House Energy and Commerce Committee, indicated his displeasure in a statement that said the process followed by the FCC may be "suitable for committee review."

Earl Comstock, president and CEO of Comptel, a group that represents competitors of AT&T, said he would have preferred to see more conditions from AT&T, and questioned why the compromise came so quickly.

"Compared to where it was in the fall, there was definite progress," he said of the deal. "But given the negotiating position (of the Democrats) it could be better."

The combination of San Antonio-based AT&T and Atlanta-based BellSouth will have operations in 22 states. AT&T estimates that about 10,000 jobs will be phased out over three years.

Combined, the companies generate about $117 billion in revenue and operate 68.7 million local phone lines stretching coast to coast across the southern United States and up through the Midwest.

The buyout will also give AT&T complete control over Cingular Wireless, the nation's largest wireless telecommunications provider, which it owns in partnership with BellSouth.

AT&T Chairman and CEO Edward E. Whitacre Jr. said in a statement: "AT&T will be an engine for innovation, competition and growth for our customers at home and abroad. In the Southeast, we will build on BellSouth's excellent record of serving customers and communities. And we are ready to lead the way in a new era of integrated wireless services nationwide."