Communications Satellite Corp. and Contel Corp. announced plans Monday for a merger under which Comsat would become the parent of a telecommunications company five times larger than itself. Contel’s top executives, however, will take over the chairmanship and the chief executive slot at Comsat.
Contel, formerly Continental Telecom, is the parent of local telephone companies operating in 30 states, including California. It would become a wholly owned subsidiary of Comsat--which sells satellite space for international transmission of telephone calls and television signals--if the deal is approved and the contemplated $2.59-billion stock transfer takes place.
Under it, shareholders of Atlanta-based Contel would receive 0.94 share of Comsat common stock for each share of Contel common. The exchange would be tax-free for federal income tax purposes, the companies said.
Created by Federal Legislation
The anomaly of the smaller entity swallowing the larger is explained, in part, by the unique origin of Comsat. The publicly traded company was created as a result of federal legislation 25 years ago to be the vehicle under which the United States could participate in the International Telecommunications Satellite Organization--or Intelsat--a consortium of 110 countries. Among Intelsat’s members, only the United States had a privately owned telecommunications system, necessitating creation of a special entity.
By law, no one person or group can own more than 10% of Comsat stock. This fact, in effect, dictated that Washington-based Comsat must be the surviving entity in any merger, noted Norman Brust, a spokesman for Contel.
The new Comsat would be headed by Contel Chairman Charles Wohlstetter. Comsat Chairman Irving Goldstein would become vice chairman, in charge of all regulated businesses and those serving the federal government.
Contel’s president, John N. Lemasters, would be Comsat’s president and chief executive, but Marcel P. Joseph, currently president of Comsat, would be president and chief operating officer of all non-regulated activities, except those serving the federal government.
Donald W. Weber would remain president and chief operating officer of Contel’s regulated phone business, which includes Continental Telephone of California.
The merger agreement must be approved by shareholders of both companies as well as by federal and state regulatory agencies.
Several telecommunications analysts reacted in a lukewarm manner to the news.
“It seems quite clear that they’re changing the name of Contel to Comsat,” said Michael D. Kennedy of the Gartner Group in Stamford, Conn. “I think it’s great for Comsat, but I’m quite concerned about the effect it’s going to have on Contel shareholders.”
To James B. Ritchey, vice president and senior utilities analyst for Gruntal & Co. in New York, potential benefits and liabilities seemed to cancel out one another. “It’s going to be a pretty neutral deal,” he predicted.
But to the two companies, the merger was made in heaven. Brust of Contel conceded that while Comsat lost money last year, it nonetheless had produced an operating profit that was overshadowed by a substantial writedown of assets.
(Comsat lost $41.5 million on $459 million in revenue in 1985 but reported earnings of $28 million for the first six months of this year on revenue of $236.1 million. Contel had net income of $239.9 million last year on revenue of $2.6 billion.)
In terms of strengthening the merger partners, Brust said Comsat Laboratories offers a prestigious research and development facility that Contel lacks, while Contel offers an extensive marketing operation in all 50 states that Comsat lacks for its products. In addition, Comsat’s international operations gives Contel a global reach into the worldwide telecommunications market, he said.