The combined company would generate about $130 billion in sales and serve nearly 70 million local phone customers.
AT&T became the largest phone company in the United States after local phone company SBC Communications acquired long-distance carrier AT&T last year for $16 billion. The company, which changed its name after the acquisition was completed, serves 13 states, mostly throughout the western and southwestern parts of the country.
AT&T on Monday said it expects to cut some 10,000 jobs between 2007 and 2009, once the acquisition has closed.
Combined with BellSouth, the third-largest local phone company in the country, AT&T will pick up another nine states in the Southeast to provide service in a total of 22 states. The combined company would generate about $130 billion in sales and serve nearly 70 million local phone customers.
In addition, AT&T will take full control of Cingular Wireless, a joint venture owned by AT&T and BellSouth. AT&T already owns 60 percent of Cingular, which is considered the largest cellular phone company in the U.S., providing service to more than 54 million subscribers in the United States.
"The Cingular partnership and the company itself are performing extremely well, particularly after the AT&T Wireless acquisition," AT&T Chairman and CEO Edward E. Whitacre said in a statement. "But no partnership between two independent companies, no matter how well run, can match the speed, effectiveness, responsiveness and efficiency of a solely owned company."
The deal is likely to rattle consumer groups, which opposed the $16 billion merger between SBC and AT&T last year. The fear among these groups is that the telecommunications market is consolidating too much, leaving fewer choices for consumers. But regulators thus far have not bought into this argument.
The main reason for this is that the local phone companies do not compete directly with each other. They operate in different regions of the country. Supporters of the megamergers also argue the phone companies are facing stiff competition from cable companies, which are now offering phone service along with television service and high-speed Internet access.
The competition has gotten so tough between cable operators and the phone companies that AT&T and Verizon, the second-largest phone company in the country, have spent billions of dollars during the past two years upgrading their networks to offer television service. Verizon is already offering TV service to consumers in several communities in Texas, Massachusetts, Virginia, and Florida. AT&T has begun testing its service in Texas and plans to offer it more widely later this year.
Whitacre called the deal "logical" in the company's press release announcing the acquisition.
"This merger is a logical next step that creates substantial value for customers and stockholders of both AT&T and BellSouth," Whitacre said. "We are confident that this is a merger we can execute, based on our track record with previous integrations and our experience working closely with BellSouth to create and build Cingular Wireless, and operate Yellowpages.com."
AT&T's latest move will likely have repercussions throughout the industry. For example, it could force Verizon to make a play for Qwest Communications, the fourth surviving Baby Bell operating company.
Verizon announced its bid for long distance carrier MCI last year after SBC had announced its acquisition of AT&T. Verizon entered a bidding war with Qwest Communications , which offers local phone service and high-speed Internet access to customers in 14 western states. Eventually, Verizon paid $8.44 billion for the formerly bankrupt MCI .
AT&T's move to acquire BellSouth could also spur Verizon into action on the wireless front. Currently, it jointly owns Verizon Wireless with European carrier Vodafone. Verizon's CEO has mentioned on several occasions that he is interested in buying Vodafone's 45 percent stake in the wireless company.
Under the terms of the proposed merger, BellSouth shareholders will receive 1.325 shares of AT&T common stock for each BellSouth common share. Based on AT&T's closing stock price on Friday, the deal will be worth about $37.09 for each BellSouth common share. That represents a 17.9 percent premium over BellSouth's closing stock price on Friday, and it puts the current value of the deal at approximately $67 billion.
The merger, which is subject to approval by shareholders of both companies, as well as regulatory authorities, is expected to close within the next 12 months, the company said.
Reuters wire service contributed to this report.