New Zealand Telecom shareholder Bell Atlantic plans to merge with fellow US provider GTE in a stock swap estimated to be worth $US52.8 billion, creating a new company combining GTE's local, long-distance, wireless and Internet services with Bell Atlantic's local and wireless offerings.
The deal means that GTE will become part of Bell Atlantic, although GTE chief Charles Lee insisted at a press conference that the merger will be an equal partnership. Under the terms of the agreement, GTE shareholders will receive 1.22 shares of Bell Atlantic stock for each GTE share they own.
"This is not a sale," Lee said in response to questions from reporters. "GTE has never been for sale. This is a merger of equals."
Lee, GTE chairman and chief executive officer (CEO), and Bell Atlantic's CEO Ivan Seidenberg will share the management of the company. Lee will have the title of chairman and co-CEO, while Seidenberg will serve as president and co-CEO. In 2002, Seidenberg will take over as sole CEO with Lee continuing as chairman until June of 2004. The merged company will get a new name, which has yet to be determined, and will be based in New York, although it will continue to have a presence in Dallas and other U.S. cities where GTE has operations.
Lee and Seidenberg touted the merger as good for competition and for customers, predicting that prices in some markets such as high-speed Internet access for homes will drop as GTE-Bell Atlantic becomes a player.
Analysts had a difficult time seeing how the deal will prove good for customers.
"Personally, I fail to see how this, on the face of it, would create competition," said George Barto, of Inteco, a market researcher based in Norwalk, Connecticut. "Clearly, it puts them in a more monopolistic position."
Regulators are likely to demand major concessions, including requiring the companies to open their local loops to competitors. Barto predicted that GTE and Bell Atlantic will be willing to make those concessions.
The merged company, which had combined revenues of $53 billion last year, is expected to grow by 15% annually. Economies of scale and operating efficiencies will lead to cost reductions of $2 billion in three years, the executives said. The merged company is expected to generate an additional $2 billion in revenue per year. It will operate in 38 U.S. states and more than 30 countries.
GTE and Bell Atlantic do not anticipate that any of their combined 250,000 employees will lose their jobs, although a small number of management positions may be eliminated. Overall, the merger should lead to the addition of jobs as new services are offered in more markets worldwide, Lee said.
The GTE/Bell Atlantic merger, if approved by federal and state regulators, would allow the combined company to offer both local and long-distance telecom services. That could potentially violate the provision of the breakup of AT&T Corp. back in 1982 that restricts regional Bell operating companies (RBOCs), the so-called Baby Bells, from offering long-distance service.
According to the US 1996 Telecommunications Act, if regional telcos providing local services also want to offer a long-distance service, they must demonstrate that they have opened up their local loop to competitors before they can provide long-distance within their service area. Bell Atlantic has not passed the test and therefore has thus far not been given the regulatory authority to provide long distance service.
Regulators might perceive that Bell Atlantic is taking an end-run around regulations by merging with a company that already is allowed to offer long-distance service, said analyst Barto.
The combined Bell Atlantic-GTE company could elect to offer long-distance service only in areas outside of the Bell Atlantic service area, but still, regulators might oppose the deal simply because of the size and nationwide scope of the alliance.
The two companies could also face regulatory headaches because of their overlapping wireless services in several US states, although the executives attempted to diminish such concerns. Both Seidenberg and Lee have been talking to regulators and those discussions were characterized as "positive" thus far.
"They have been understanding. They have been thoughtful," Lee said of his conversations with regulators.
The proposed merger will be scrutinised by both the US Federal Communications Commission (FCC), which oversees issues related to the Telecommunications Act, and the U.S. Department of Justice (DOJ), which will investigate potential antitrust aspects of the deal.
The deal should take 12 to 18 months to complete, Lee said.
And those months are likely to prove rocky at times.
"If we thought MCI/WorldCom was put through the wringer, we haven't seen anything yet," analyst Jeffrey Kagan said in e-mail today, referring to the recent merger of MCI Communications and WorldCom Inc. That merger underwent intense scrutiny from U.S. and European regulators and required MCI to divest its Internet backbone business before it was approved.
"Regulators will have a heyday with Bell Atlantic and GTE," Kagan said, adding that it wouldn't be surprising if the companies are required to give up wireless or Internet assets and possibly customers in some markets.
"It is painfully obvious that they are struggling to explain how this is going to be pro-competitive to the marketplace," Kagan said in his e-mail after the press conference. "When asked how this deal will be pro-competitive and how it will spur competition in the marketplace, they focused on how the deal will strengthen and make the combined company more competitive, not on how it will encourage competitors and competition."
That the combined company will be more competitive by strengthening weak spots is obvious, he said, "but it is still unclear how this will help jump start competition in the local or long-distance marketplace."
Analyst Barto said regulators may well take a dim view of what could be perceived as Bell Atlantic's end-run around the Telecommunications Act, merging with a company that already offers long-distance service rather than having to meet regulations to offer such service on its own.
A Sprint executive also weighed in with comments. In a written statement, J. Richard Devlin, Sprint executive vice president, called the proposed merger "another slap at consumers."
Instead of opening local markets, "the telephone monopolies are merging to become even more stifling and powerful," Devlin said in the statement, which also criticised other recent major telecommunications mergers. Sprint is primarily a long-distance carrier.
"The fact is that fewer than 2%of Americans have a choice of local telephone providers," the statement said. "That is because the entrenched regional Bell companies and GTE have used stall tactics, relentless legal challenges and other roadblocks to preserve their monopolies. The mega-mergers deliver an even more profound blow to competition because potential competitors simply disappear."
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