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GTE's merger plan rouses regulators

Published Oct. 18, 1997
Updated Oct. 2, 2005

If GTE Corp. gobbles up MCI Communications Corp., it would mean the loss of a potentially large player in the lucrative Tampa Bay local phone market. And that possibility could raise concerns with federal regulators if they are asked to approve a deal between the two companies.

While MCI isn't serving local residential customers yet _ that market has yet to open up to competition _ it began offering local calling in January to business customers in Tampa as part of a service package that includes long-distance and Internet access.

"When you look at where MCI has started up their local operations, Tampa is one area," said Beverly Menard, GTE's head of regulatory affairs in Florida. "That would logically be a place the Justice Department would look if we have the merger."

GTE and MCI also have overlapping operations in the fast-growing markets of Portland, Ore., and Seattle, two other regions that would draw scrutiny.

Concern about the possible elimination of a major competitor to GTE is just one of several possible obstacles for GTE's $28-billion cash bid _ the biggest all-cash deal ever _ for the nation's No.

2 long-distance carrier.

Regulators also may put pressure on GTE to do more to open its local markets to competition.

GTE has been accused of stalling competitors that want to offer local phone service to homes in Tampa Bay and other markets. So far, GTE has been unfettered by the tough legal restrictions applied to companies that made up Ma Bell, the old AT&T Corp.

But that could change if GTE ends up with the winning bid for MCI. Regulators may force it to do more to open its local markets if the deal goes through.

Wall Street initially reacted sourly to the proposed deal, sending GTE's shares down a total of 11 percent Wednesday and Thursday. Investors lightened up a little on Friday, sending the Stamford, Conn.-based company's stock up $1.31\ to close at $46.06\.

But investors still worry about GTE's projected slowdown in earnings in 1999 as well as the cost of borrowing $30- to $40-billion to finance the deal.

These concerns haven't stopped GTE from taking the offensive in promoting the deal as good for consumers. "Our position is that this merger will be pro-competition," Menard said.

The idea that GTE is favoring competition makes some consumer advocates and rivals laugh. They have long complained that the company has tried to stall competition in the local phone market by fighting some of the provisions of the 1996 Telecommunications Act in court.

GTE and the regional Bell phone companies recently won federal court orders blocking the Federal Communications Commission from setting pricing guidelines for competitors to lease access to their systems. That has forced companies to seek such pricing guidelines from each state.

Long-distance carriers say such obstruction has cost them plenty. The main reason MCI has not offered local calling to residential customers in Tampa Bay is because it is too expensive to lease GTE's local networks, said MCI spokeswoman Eileen C. Mullen.

"With absolute certainty, GTE has been the least consumer-friendly local exchange carrier," said Monte Belote, executive director of the Florida Consumer Action Network.

GTE counters that the intent of the legal actions is to ensure that the playing field is level. The company contends that competitors will go after its highest-volume business customers, possibly forcing GTE to raise rates for residential customers.

"What this (legal) action does is make GTE look like the potential monopoly giant that Congress, Justice and the courts feared with the old Bell system," said Gene Kimmelman, co-director of the Consumers Union's office in Washington, D.C. "So there is a strong rationale for imposing many of the same protections for competition on a GTE-MCI transaction as have been imposed on transactions with the Bell companies and AT&T."

_ Information from the Associated Press was used in this report.

Big phone deals

Big events in the telecommunications industry since a February 1996 law freed local and long-distance companies to enter each other's business:

APRIL 1, 1996: SBC Communications Inc. agrees to buy Pacific Telesis Group for $16.7-billion in the first big phone-company makeover since the breakup of Ma Bell in 1984. The deal is completed exactly one year later.

APRIL 22, 1996: Bell Atlantic Corp. and Nynex Corp. agree to merge in an exchange of stock. The $25.6-billion deal is completed Aug. 14, 1997.

AUG. 26, 1996: Long-distance upstart WorldCom Inc. agrees to buy MFS Communications Co., which provides local-phone service and Internet access. The $12-billion stock deal is completed Dec. 31, 1996.

MAY 27, 1997: Sources say AT&T Corp. is discussing a merger with SBC Communications valued at $50-billion or more. The talks break down a month later after federal regulators voice antitrust concerns.

NOV. 2, 1996: British Telecommunications PLC agrees to buy the remaining 80 percent of MCI Communications Corp. for $20.8-billion in cash and stock. The deal would be the biggest foreign takeover of a U.S. company.

AUG. 22, 1997: BT cuts its bid for MCI to $18.9-billion following MCI's announcement just more than a month earlier that its annual U.S. local telephone losses would total $800-million.

OCT. 1, 1997: WorldCom announces it is offering $30-billion worth of stock for MCI in what would be the biggest U.S. merger in history.

OCT. 6, 1997: Reports first surface that AT&T is in serious talks about purchasing GTE Corp. GTE's stock rises sharply, but neither company comments on the speculation.

Oct. 15, 1997: GTE offers $28-billion in cash to buy MCI and thwart bids by BT and WorldCom.