Long-Distance Firms to Merge : Sprint, US Telecom Seek to Cut Losses, Expand
On the eve of a competitive free-for-all fight over the nation’s long-distance telephone customers, GTE and United Telecommunications, owners of the third- and fourth-largest long-distance phone companies in the country, said Thursday that they will combine those money-losing units this year in a 50-50 partnership to cut their losses and bid for the No. 2 spot behind American Telephone & Telegraph.
The combination of GTE’s Sprint and United’s US Telecom will initially have more than 2.2 million customers, most of them coming from Sprint’s current roster of 1.5 million residential and 355,000 business users. That will make it the third-largest service, with 3.4% of the market’s dollar volume.
AT&T;, the long-distance leader by a wide margin, has more than 76 million customers and 78.9% of the market, and MCI Communications is second, with 3.5 million customers and 6.2% of the market, according to estimates by the Yankee Group, a Boston consulting firm.
The joint venture, which the companies said they expect to implement on July 1, was announced as competition among specialized long-distance carriers is about to intensify. Local telephone companies have begun mailing ballots to customers asking them to select a specific long-distance company, giving the half-dozen smaller companies their first real chance to erode AT&T;’s overwhelming dominance of the market.
The GTE-United partnership is the third such consolidation in less than a year in the telecommunications industry. Earlier, MCI acquired Satellite Business Systems, the operator of the Skyline long-distance service, from IBM for 45 million MCI shares, and last month Allnet Communications and Lexitel merged to form what is likely to be the nation’s fourth-largest long-distance network.
GTE and United executives acknowledged that the partnership--to be formally known as US Sprint Communications and to be marketed under the Sprint name--is virtually their only chance to successfully compete in the new market.
“The new company will be a more formidable competitor in the industry than either is now or was going to be alone,” GTE Chairman and chief executive Theodore F. Brophy said.
Added United’s president and chief executive, William T. Esrey: “Our principal risk was the ability to build market share fast enough to compete against a deregulated AT&T.;”
US Sprint will also encompass the two parent companies’ data transmission networks, which are known as GTE Telenet and Uninet and enable business users to link computer systems. That will enhance its ability to compete for business customers, who are crucial to a network’s success because they are willing to pay premium prices for exotic services that price-conscious residential users consider unimportant.
Still, some industry professionals say that the joint venture has several potential pitfalls, chief among them the chance that it will lose momentum until the partners grow accustomed to each other in the venture’s first year.
Several analysts expressed concern about US Sprint’s management arrangement, which involves the creation of an “office of the president” to be shared by US Telecom President Charles M. Skibo, GTE Sprint President Donald G. Prigmore and GTE Telenet President J. David Hamm. The company will have no specific headquarters, and its three chieftains will continue to work in three different cities.
“The ‘office of the president’ is the largest reason to doubt the success of the venture,” Mary Johnston of the Yankee Group said.
No Obstacles Seen
The arrangement must be reviewed by the FCC and the Justice Department, but the parent companies and industry analysts said they expect few regulatory obstacles.
GTE and United executives said they hope to compete with AT&T; and MCI principally by offering customers the most technologically advanced service--and, they hope, the most cost-efficient--of any long-distance network.
The executives said that, by expanding United’s already extensive fiber-optics communications lines throughout the country, US Sprint would offer better quality transmission and higher reliability than other services. Although expensive to install, fiber-optics lines can carry much higher volumes of calls at far lower cost than conventional phone lines.
The companies said they plan by the end of this year to extend the fiber-optics network, now comprising US Telecom’s largely Midwestern network of 4,700 miles and Sprint’s 1,100-mile system serving sites between California and Florida, to a total of 14,200 miles serving 80% of the country.
As separate systems, Sprint and US Telecom have been losing money for several years. Sprint lost more than $300 million in 1985, according to Wall Street estimates, and United Telecom lost about $60 million in the same period. Sprint, moreover, was expected to lose an additional $325 million this year, said Robert B. Morris III, a telecommunications analyst for Montgomery Securities in San Francisco.
To accommodate the new partnership, both parents will take significant write-downs on their existing investments in the long-distance carriers.
Stamford, Conn.-based GTE will take a $1.3-billion charge against earnings for the fourth quarter of 1985. That write-down will more than wipe out the company’s profit for 1985, GTE’s Brophy said Thursday. Analysts were expecting GTE to post 1985 net profits of about $1.1 billion, or $5.10 a share; the charge will cost about $6.20 a share.
Most of the charge, Brophy said, will cover GTE investments in Sprint that will be rendered superfluous or otherwise suffer reduced value because of the partnership.
‘Pretty Strong Medicine’
United’s Esrey said that his company will take a write-down of about $170 million, or $1.81 a share, a figure that he called “pretty strong medicine.” Kansas City, Mo.-based United was otherwise expected to post 1985 profits of about $215 million. The company will also pay GTE about $230 million to cover the larger company’s greater contribution to the joint venture.
Industry observers consider the joint venture to be an unalloyed plus for GTE, which, as the largest non-Bell operator of local telephone systems, serves parts of Southern California, Hawaii, Florida, Texas and the Midwest.
The move “automatically cuts Sprint’s relative losses (for GTE) in half,” because the partnership’s profits and losses will be shared equally between the parents, analyst Johnston said.
Furthermore, capital requirements for the two partners will be less than either had planned to spend this year on its own. GTE Senior Vice President James L. Broadhead said the partnership will spend about $1 billion in its first year; financial analysts had been expecting GTE to spend about $600 million and United about $1 billion on their own this year. Between now and July 1, the company executives said, United may slightly step up its capital spending and GTE will cut back in order to avoid duplicating projects.
Wall Street investors blithely shrugged off GTE’s huge write-down, which will not affect the company’s strong cash flow or its dividend payments. Both credit-rating agencies, Standard & Poor’s and Moody’s Investor Services, said that they considered the partnership a positive move for GTE. The company was the fourth most active issue Thursday on the New York Stock Exchange, closing at $48.125 a share, up $1, on volume of 1.9 million shares.
United also closed up, rising 62.5 cents a share to $24.875.
