AT&T/BellSouth merger faces onerous conditions

AT&T’s $68bn takeover of BellSouth will face a tough political climate in Washington in 2007 when Democrats take control of the Congress, virtually ensuring that the former Ma Bell will have to agree to harsher conditions.

The possibility that the telecoms mega-merger would be approved by the Federal Communications Commission before the end of this year appeared to disintegrate on Monday after Robert McDowell, a Republican commissioner at the FCC, said he would abstain from deadlocked negotiations over the transaction at the regulatory agency.

The decision marks the beginning of what is likely to be a difficult period for Kevin Martin, FCC chairman and a savvy political operator who has, until now, faced few serious hurdles on his agenda. Among other issues, Mr Martin will probably be forced to defend the FCC’s future decision on the AT&T deal and separate deliberations on media ownership limits before Democratic lawmakers next year.

With Mr McDowell out of the game, AT&T will be forced to succumb to at least some of the demands of the FCC’s two Democratic commissioners, who are expected to have the backing of the new Democratic majority in the Congress on issues ranging from net neutrality to “special access” price freezes, covering competitors’ access to its network.

“There seems little doubt that McDowell’s move strengthens the Democrats’ hand and, while AT&T has been complaining of ‘moving goalposts’ in their negotiations, the goalposts look set possibly to move again on the topics … where talks appear to have stalled,” noted David Barden, a Bank of America analyst.

Gene Kimmelman of Consumers Union, a public advocacy group, said AT&T had held out on agreeing to some concessions so far because it had made a miscalculation that Mr McDowell would weigh in on the stalled talks.

AT&T on Tuesday said it had sought support from every member of the FCC since “the very beginning”.

Analysts believe the Democrats are insisting on special access price freezes that exceed 30 months – something AT&T might be willing to accept – and an arbitration process governing wholesale price disputes, which they believe AT&T opposes if it relates to AT&T specifically.

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