The New York Times, 7 May 1999

FCC Staff Cites Flaws in Phone Deal Plan

By Barnaby J. Feder

The proposed $62 billion combination of SBC Communications Inc. and Ameritech Corp., two of the nation's largest regional telephone companies, "flunks the public interest test" and should be blocked unless conditions to encourage competition are imposed, according to staff investigators for the Federal Communications Commission.

Thomas Krattenmaker, who has overseen the agency's review, summarized the staff's concerns Thursday at the opening of a public hearing on the deal in Washington. Krattenmaker stopped short of endorsing any of the deal-killing restrictions that have been suggested by opponents of the merger, such as requiring that the two companies first demonstrate that they have met the goals of 1996 legislation aimed at stimulating local phone competition. Nor were any of the five commissioners who must eventually vote on the deal present.

Still, investors were concerned that the vehemence of the staff's opposition might indicate that the companies would have to make significant concessions to win approval. Shares in SBC, which is based in San Antonio and is the acquiring company in the deal, fell $1.1875, to $53.50, on the Big Board. Ameritech, which is based in Chicago, dropped $1.25, to $66.0625.

"What the public is seeing now is that these are hard-nosed negotiations," said Scott Cleland, an analyst for the Legg Mason Precursor Group. "But it has been -- and still is -- unlikely that there are three votes on the commission to block this merger."

SBC and Ameritech played down the significance of Krattenmaker's remarks and the hearing, in which both supporters and opponents testified. "We didn't hear anything we hadn't heard before," David Schlosser, a spokesman on regulatory affairs for SBC in Washington, said. "It's a chance to see it all in living color."

Schlosser said SBC and Ameritech had met with the FCC more than 60 times since the proposed deal was announced a year ago. In recent weeks, Schlosser said, the agency's staff has been meeting with representatives of the two phone companies on Mondays, Tuesdays and Wednesdays, with opponents on Thursdays and working on its own on Fridays.

The law requires that before approving the merger, the agency must find that the combination would serve the public interest. The two phone companies have argued that they meet that standard without any conditions but have also opened the door to accepting "narrowly tailored" concessions. They have already divested themselves of overlapping cellular phone operations to satisfy the Justice Department concerns over possible antitrust violations. The deal has been approved by Ohio regulators, and reviews are under way in other states.

The FCC has no time limit on its review, but William E. Kennard, its chairman, said in a letter to the companies that he wanted an agreement on conditions that would allow the deal to be approved by the middle of June.

Together, SBC and Ameritech would dominate phone service in a swath of 11 Midwestern states from Texas to the Canadian border as well as California and Nevada.