Associated Press

July 13, 2006

NEW YORK - Shares of AT&T Inc. slipped Thursday along with much of the telecommunications sector and the broader market, the day after a federal judge said he will review two earlier telecom mergers, which may mean more hurdles for AT&T's planned takeover of BellSouth Corp.

AT&T, which was itself scarfed up by SBC Communications, its former subsidiary, in November, is poised to take over BellSouth in a $67 billion deal by the end of the year. On Wednesday, at a hearing on wireline mergers, U.S. District Judge Emmet Sullivan scheduled a hearing for July 25, over the AT&T/SBC merger and Verizon's takeover of MCI Inc., which closed in January.

While the judge said he would not issue a ruling at that time, his eventual word on these two mergers could influence antitrust policy on the AT&T-BellSouth deal, said Prudential analyst Susan A. Lynner in a note to clients. Analysts do seem to agree there is little, if any, chance of the already completed mergers being unraveled, and it's even unlikely that AT&T will not be able to close its BellSouth acquisition.

At the same time, the deal may face "greater than expected regulatory scrutiny" in light of the judge's review of the two past telecom mergers, said AG Edwards analyst Kent Custer in a note to clients, downgrading BellSouth to "Sell" from "Hold."

While he still sees the deal's approval as more likely than not, the analyst said "the potential risk of merger opposition and price deterioration" are no longer balanced by the potential share price gain from the merger's successful completion.

Custer also cautioned that sellers could incur "significant tax liability on long term, low-cost basis holdings." Shares of BellSouth fell 89 cents, or 2.5 percent, to $34.37 in afternoon trading on the New York Stock Exchange. The stock is still in the high end of its 52-week range of $24.32 to $36.72.

Shares of AT&T fell 57 cents, or 2.1 percent, to $26.60 on the NYSE, having traded between $21.75 and $28.82 in the past year.

Standard & Poor's telecom equity analyst Todd Rosenbluth also said he sees the AT&T-BellSouth deal going through. Unlike the current merger, the AT&T-SBC deal meant taking out a direct competitor, while the BellSouth takeover has limited consumer overlap. Prior to the deal, the analyst said, AT&T was reducing its competitive presence in BellSouth territory.