Regulatory News – BA-GTE Pairing Heads Up Local, Wireless Race

Posted:  08/2000

BA-GTE Pairing Heads Up Local, Wireless Race
By Kim Sunderland

There’s a new leader in the race to control the local and wireless segments of the telecom industry since the FCC
(www.fcc.gov) approved the Bell Atlantic Corp.
(www.bell-atl.com) and
GTE Corp. (www.gte.com) merger earlier this summer.

Setting 25 conditions, the FCC approved a two-year-old deal. The new business, Verizon Communications, offers bundled services.

“Our merger will be a transforming event for both of our companies,” says Charles R. Lee, chairman and chief executive of GTE and designated chairman and co-CEO of Verizon. “It will enable us to offer customers the richest array of high-growth communications services over the most extensive national footprint and in the world’s most attractive markets.”

Verizon co-CEO Ivan Seidenberg, chairman and CEO of Bell Atlantic, says Verizon will become “the next great brand in communications,” capitalizing on the “new economy growth trends that are shaping communications in the U.S. and around the world.”

The FCC approved the deal after it was satisfied the companies would spin off GTE’s nationwide Internet business into a separate public corporation, which will be called Genuity Inc.
(www.genuity.com).

Section 271 of the Telecommunications Act of 1996 forbids a BOC from providing long-distance voice or data services in its region before it demonstrates that its local market is open to competition.

“In this era of convergence, we must be mindful of over-consolidation,” FCC chairman William E. Kennard says. “There will be those that will claim this merger brings us closer to a reemergence of Ma Bell; however, my support is predicated on the applicants’
enforceable commitments to open its traditional local markets to competitors, invest in new markets, and accelerate deployment of broadband technologies.

“The end result,” Kennard says, “should produce more competition, not less.”

Competitive Conditions

The merger conditions actually may benefit competitors, says Jason D.
Oxman, senior counsel for Covad Communications Co. (www.covad.com).

For example, numerous process changes to the companies’ OSSs are required, which is something GTE refused to do prior to the merger.

And the conditions could give competitors some leverage with the two ILECs, says Don Bilson, an equity analyst with Formula Fund Management LLC in New York.

“If any battle between Verizon and the FCC arises,” he says, “I
suspect it will center on how Bell Atlantic and GTE treat CLECs in their existing territories.”

Oxman says Bell Atlantic/GTE could be fined more than $1 billion in penalties if the merged company doesn’t adhere to the conditions.

Long Distance on Horizon

Bell Atlantic currently has permission to offer long-distance services only in New York state. But Seidenberg says the companies hope to have Bell Atlantic’s future 271 approvals in hand within two years. Once Verizon gets approval to offer long-distance service throughout Bell Atlantic’s territory, it can have up to an 80 percent stake in Genuity.

Specifically, the FCC ruling says that Bell Atlantic can’t convert its permissible 9.5 percent interest in Genuity into a greater equity ownership unless it receives long-distance approval within five years covering 95 percent of its region where Genuity operates. Verizon also is prohibited from receiving economic benefits from Genuity’s long-distance services of Genuity “for those states in which Bell Atlantic is restricted from providing long-distance services,” the FCC says.

Competitors have complained that if in the future Bell Atlantic buys more of Genuity, the BOC would be circumventing the Telecom Act.

Kennard does not seem to be worried. “My support also rests on the merged company’s compliance with Section 271,” he says. “I could not have allowed this, or any other merger, to violate this core act provision.”

Gaining Ground

Landing GTE marks another step in Bell Atlantic’s evolution into a telecom powerhouse. In 1997, the company merged with Nynex Corp.–one of the other seven Bell companies created from the 1984 breakup of AT&T Corp.
(www.att.com). Verizon now becomes the largest local phone company, controlling 63 million phone lines with a presence in more than 30 states.

In the U.S. market, Verizon unites GTE’s mostly suburban and rural operations with Bell Atlantic’s operations in 13 Eastern states and the District of Columbia. Verizon’s wireline operations will reach one-third of all U.S. households and serve two-thirds of the top 100 markets, including nine of the top 10.

Verizon Wireless
(www.verizonwireless.com)–formed in April through a joint venture of Bell Atlantic and Vodafone AirTouch plc
(www.vodafone.com)–now gains GTE’s wireless assets, making it the nation’s largest wireless company, serving 25 million wireless customers and almost 4 million paging customers.

The company also plans to be a leader in the high-grown data markets, Lee says.

He adds that Verizon will “never say never” to more acquisition opportunities in the future. “Telecommunications in the future is
end-to-end connectivity, and we’re an unfinished symphony in that area. We’re confident we’ll transform … into a global leader.”

Some Dissension

While the FCC’s ruling was unanimous, commissioners Harold Furchtgott-Roth and Michael K. Powell dissent in part on the decision.

“I do not endorse the quasi-antitrust analysis that this commission has used to determine whether a license transfer is in the public interest,” Furchtgott-Roth says. “And I do not join in those portions of this order that follow this approach.”

Commissioner Powell says he believes that “fewer conditions, tailored to address the specifically identified harms, would have been the correct result” of the FCC’s order.