DBRS Places SBC Communications UR-Developing

Dominion Bond Rating Service (“DBRS”) has placed the ratings of SBC Communications Inc. (“SBC” or the “Company”) and its wholly owned finance subsidiary, SBC Communications Capital Corporation, “Under Review with Developing Implications” following the announcement that it would acquire AT&T Corporation (“AT&T”) for cash and shares totalling US$19.71 per AT&T share. This includes a US$1.30 per share special dividend to be paid by AT&T to its shareholders. The total equity value of the transaction would be US$16 billion. Including AT&T’s net debt of approximately US$6 billion, the transaction has a total enterprise value of roughly US$22 billion. DBRS has also placed its ratings of AT&T “Under Review with Developing Implications” – see separate press release. The transaction will require AT&T shareholder approval, as well as extensive regulatory approval, and is expected to close in the first half of 2006.

At this point, it appears SBC would assume modest financing risk, given the sizeable equity component of its offer and AT&T’s reasonable financial risk profile. However, the exact nature of how these two companies will be combined is unspecified at this time. For example, AT&T could remain a separate, wholly owned subsidiary with no SBC guarantee extended to its creditors. In this case, SBC would not subject SBC’s bondholders to greater financial risk, which is key given it has recently increased debt levels by roughly US$10 billion to help Cingular Wireless LLC (“Cingular”, 60%-owned by SBC) acquire AT&T Wireless Services Inc.

Even with the expected arduous regulatory approval process necessary to complete this transaction and potentially any necessary modifications to the proposed transaction, DBRS believes SBC’s acquisition of AT&T would provide:
(1) A sizeable business customer base and a sizeable domestic network with international operations;
(2) Ownership of one of the strongest global brand names;
(3) The ability to realize significant synergies – up to US$15 billion on a net present value basis;
(4) The ability to migrate its current and planned voice and data traffic onto its own network. This includes its traditional incumbent local voice and data business which will include more volume and video under its Lightpath initiative as well as wireless traffic from Cingular; and
(5) The ability to cross-sell services, including wireless, to existing AT&T customers.

Even so, DBRS notes that AT&T will continue to operate in an industry that has an inherently higher business risk profile than SBC and the change in the business mix for the group as a result of this acquisition may not be offset by the sizeable synergies extracted from AT&T as planned. Additionally, the pricing pressure and oversupply is expected to continue in the long-haul industry. Despite the aforementioned benefits, this transaction does not resolve these pressures given the industry-wide disequilibrium of supply and demand.

Note:
p – This rating is based on public information.

DBRS's rating definitions and the terms of use of such ratings are available at www.dbrs.com.

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