Merger Crumbles, but Contel to Buy 2 Parts of Comsat

Communications Satellite Corp. and Contel scrapped their proposed $2.5-billion merger Monday but agreed to a deal in which Contel will acquire two money-losing Comsat units for $38 million.

The collapse of the merger plan was foreshadowed in April after the Federal Communications Commission ordered Comsat to refund $62 million in customer overcharges. Atlanta-based Contel, formerly known as Continental Telephone, said at the time that this and other FCC regulatory moves had cooled its interest in the merger.

For example, federal regulations require that transatlantic communications traffic be split evenly between satellites and cable but the FCC is considering dropping this rule at a time when one of Comsat’s largest customers--American Telephone & Telegraph--is building a fiber-optic transatlantic cable. Industry analysts say this development is certain to hurt Comsat’s satellite communications business.

“You can draw your own conclusions,” said Kenneth A. Bomar, a Contel spokesman, “but those were the sorts of reasons that we had given some time ago for feeling that the merger was not now in our best interest.”

On April 30, John N. Lemasters, Contel’s chief executive and an architect of the merger strategy, resigned, fueling speculation that he had lost the support of Chairman Charles Wohlstetter, the company’s founder and an early backer of the plan.

Lemasters’ replacement, Donald W. Weber, called the termination of the agreement “mutually beneficial to both parties.” The company cited “differences in both management philosophy and operating policy.”

Under the settlement, Contel’s American Satellite Co. will buy part of Comsat International Communications, which provides private-line transmission services to 19 countries for such customers as the State Department, Merrill Lynch and Citibank. Contel also bought another one of Comsat’s unregulated units, its “very small aperture terminal” business, which sells satellite dish antennas up to six feet in diameter.

Comsat Chairman Irving Goldstein said that, with the divestiture, his company is “drawing a clearer line of distinction” between its regulated and unregulated businesses.

Washington-based Comsat was created by Congress more than 25 years ago to, among other things, be the U.S. participant in Intelsat, the 144-country satellite consortium that carries international telephone and video traffic.