SBC's AT&T Buy No Blunder

Yesterday, Fool contributor W.D. Crotty said, "No" to the just-announced acquisition by SBC Communications (NYSE: SBC  ) of its former parent AT&T (NYSE: T  ) . I say "Yes."

With all the bad news from Ma Bell over the years, it's true that it might be hard to argue for AT&T as an acquisition target. The business founded by Alexander Graham Bell 130 years ago is eroding. The long-distance phone company's revenue is expected to fall by 13% next year.

Nevertheless, I disagree with W.D. I think this could provide a good buying opportunity for SBC.

Left to its own devices, AT&T may not be worth much. But if SBC can put a brake on AT&T's troubles, that could translate into a good deal.

Here is what SBC gets from the deal:

Buying AT&T, SBC breaks into the top spot in the corporate long distance market, an area with few serious competitors. Remember, MCI (Nasdaq: MCIP  ) is still hampered by the WorldCom scandal and under-funding. Sprint (NYSE: FON  ) increasingly has its sights set on becoming a wireless operator. Meanwhile, AT&T has built a first-rate Internet protocol network treasured by big global customers.

SBC gets a fresh supply of cash. AT&T produces plenty of the stuff -- about $3.7 billion in 2004. This could be used to trim some of SBC's $27 billion in debt. Or it could come in handy when paying for costly fiber networks needed to deliver TV services and fend off Comcast (NYSE: CMCSA  ) and other cable operators.

Then there's the AT&T brand name. Sure, the AT&T brand has been bruised over the last couple of years, but it's still a respected household name and worth an awful lot -- possibly $5 billion to $10 billion. Just imagine AT&T's long-distance, SBC's local and Internet services, and 60%-SBC-owned Cingular's wireless offerings all sold under the same trusted AT&T marquee.

Besides, AT&T isn't all that expensive. SBC executives believe they can reap huge cost savings and synergies from the deal. Indeed, if SBC can stem the decline in AT&T's profits by, say, a third, it is still only paying about five times next year's cash flow for AT&T.

Admittedly, AT&T is running poorly and looks like a clunker. But look under the company's hood and you can find some valuable parts -- at a pretty good price -- that can be put to work somewhere else. SBC might just be the company to make something of them.

SBC is aMotley Fool Stock Advisorrecommendation and MCI is aMotley Fool Inside Valuerecommendation.

Fool contributor Ben McClure doesn't own shares of any of the companies mentioned here.


Read/Post Comments (0) | Recommend This Article (0)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 490187, ~/Articles/ArticleHandler.aspx, 9/2/2014 8:37:57 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement