MCI to Buy Telecom USA, Cements Its No. 2 Position

In the biggest merger yet in the rapidly consolidating long-distance telecommunications business, MCI Communications on Monday strengthened its position as the nation’s No. 2 carrier by agreeing to buy fourth-ranking Telecom USA for $1.25 billion.

By absorbing Telecom’s estimated 1.4% share of the fast-growing $60-billion long-distance market, MCI will increase its share to nearly 15%, compared to the 8.6% share of third-place U S Sprint but still far behind American Telephone & Telegraph’s 68.7%. The deal also will open new areas of technology and territory to MCI and could result in cost savings and improved quality of service for customers, analysts said.

But the deal also may help spur additional consolidation in the long-distance market, which could reduce competition and eventually lead to higher rates, some analysts fear.

The definitive agreement, already approved by the directors of both companies, calls for MCI to pay $42 a share for Telecom. Telecom’s stock, the New York Stock Exchange’s second-most-active issue Monday, spurted $16.25 per share to close at $38.125. MCI stock slipped $1.125 a share to end at $35.75 in over-the-counter trading.

Both companies have grown rapidly in the past few years by buying competitors. Atlanta-based Telecom, formerly a regional carrier called SoutherNet, was formed in 1988 by merging with Teleconnect, a Midwestern carrier based in Cedar Rapids, Iowa. The merged company earned $36.9 million last year on sales of $713 million.

MCI has grown by absorbing Satellite Business Systems, Western Union International and RCA Global Communications. It had 1989 revenue of $6.5 billion and net income of $558 million.

In all, the number of long-distance telephone companies, many of them catering only to specialty markets, totaled nearly 500 a few years ago but has dropped “into the 300s,” according to the Competitive Telecommunications Assn., a trade group made up of many of AT&T;’s competitors (including Telecom and Sprint but not MCI).

Telecom serves 500,000 customers in 31 states and publishes phone books in 26 Midwestern markets. It also offers voice messaging, telemarketing and a Voice News Network with more than 100 categories of information. Moreover, the company owns and operates a 3,000-mile optical-fiber network radiating from its twin hubs in Georgia and Iowa.

Telecom has been “very aggressive in developing new products,” said Stephen J. Shook, an industry analyst for Interstate-Johnson Lane in Charlotte, N.C. As part of MCI, he said, “they could get much broader exposure for these products.”

But the resulting consolidation troubles industry experts such as Paul Daubitz, president of ATI Telemanagement, a Newbury, Mass., consulting firm. “We’re going to end up with three or four AT&Ts;,” Daubitz predicted.

“Three, four or five companies will have 90% of the market, and it will stabilize the competition, which is absolutely fierce right now, but basically only between AT&T;, MCI and Sprint,” Daubitz said.

LONG-DISTANCE MARKET SHARE

How the phone companies split the nation’s $60-billion long-distance market before and after the agreed merger of MCI and Telecom.

Percent Percent Company Pre-merger Post-merger AT&T; 68.7 68.7 MCI 12.9 14.3 US Sprint 8.6 8.6 Telecom USA 1.4 -- Metromedia-ITT 1.0 1.0 Others* 7.4 7.4

*More than 300 companies, largest of which are ATC/Microtel, Cable & Wireless, Williams, Litel, RCI, Com Systems.

Source: Estimates by Dataquest as of Dec. 31, 1989