PacTel Acquired in $16-Billion Deal by Texas Baby Bell
A historic reshaping of America’s telecommunications industry accelerated dramatically Monday as California’s dominant telephone company, Pacific Telesis Group, agreed to be swallowed up by Texas-based regional phone operator SBC Communications Inc. in a deal valued at $16.7 billion.
The acquisition marks the first union among the Baby Bell companies created by the 1984 breakup of AT & T--and analysts say it won’t be the last. Congress lifted the ban on such combinations in February as part of a sweeping overhaul of the nation’s communications laws, and a wave of mergers and acquisitions is now underway as companies experiment with new formulas for success in the newly competitive market.
The deal announced Monday creates the second-largest U.S. telecommunications company after AT & T Corp., with 30 million phone lines and operations in seven of the 10 largest metropolitan areas in the United States--including Los Angeles, Boston, Chicago and Dallas.
Industry observers said the combined companies would be better able to compete in burgeoning wireless and international markets, and that SBC’s strong financial management would complement PacTel’s technical excellence.
But consumer advocates worry that this merger and others like it will undermine the stated purpose of the new telecommunications legislation, ultimately leading to less competition, not more. And some analysts said PacTel, whose financial position has been shaky since the spinoff of its cellular operations two years ago, had accepted a low-ball bid.
“I think they’re selling themselves way too cheap,” said Craig Ellis, telecommunications analyst at Wheat First Butcher Singer in Richmond, Va. “I think they went too soon, too early.”
The deal is still subject to federal and state regulatory approval, but most observers said that is not likely to be a problem. It’s also possible that a rival bidder could emerge. The companies said they hope to complete the deal by the end of the year.
If it goes through, the deal is expected to create about 1,000 new jobs in California when SBC moves some existing administrative, long-distance and Internet operations to the state. But PacTel will continue to pursue its goal of eliminating 10,000 jobs by 1998.
Some analysts questioned why SBC did not opt to merge with a long-distance company, which would have immediately broadened its reach. Others wondered why PacTel, rumored to be pondering a bicoastal alliance with Nynex and Bell Atlantic or US West, whose territory is contiguous with its own, had chosen a regional company with little apparent geographical logic.
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But SBC Chairman and Chief Executive Edward Whitacre Jr., who will assume those titles at the combined companies, said the PacTel merger made sense both for financial and cultural reasons. “From our standpoint, California is the most populous state, Texas is No. 2,” he said. “Our people think alike, and we’re admirers of the way Pacific has run their network and their business.”
Said Phil Quigley, PacTel’s chief executive and prospective vice chairman of the new firm: “There’s no better combination for us than SBC. We believe this creates a powerful long-distance entity. No one else was even close.”
SBC will gain a gateway to lucrative Asian and Mexican markets through PacTel’s California base and will acquire licenses for wireless services in California. It also hopes to capitalize on PacTel’s expertise in new services such as Internet access. SBC’s position as the No. 2 wireless provider in the nation would help make up for PacTel’s weakness in that area.
The combined companies would also be better able to mount a challenge in the lucrative long-distance business, which the Baby Bell companies will probably gain permission to enter over the next several years.
In recent years, SBC has been the strongest-performing Baby Bell company, thanks largely to the economic growth of Texas and urban areas in Missouri and a healthy cellular phone operation. Pacific Telesis, concentrated in California, has suffered from the state’s sagging economy and the opening of its toll-call market to competition last year.
Moreover, with the passage of the new telecommunications law, PacTel’s prized local business is already under siege. With no cellular operations to offset its losses and the need for large capital investments to start new businesses, analysts said PacTel needed a partner.
But the motivation to merge is not unique to PacTel’s situation. The new telecommunications law allows industries once strictly segregated to compete in each other’s businesses, and many of them are searching for partners to give them the competitive advantage of scope and scale.
US West said last month that it would pay $10.8 billion for Continental Cablevision, the nation’s third-biggest cable TV firm. Long-distance giants AT & T and MCI are rumored to be mulling a local phone service alliance.
And many investors expected the first merger of Baby Bell companies, formed in the 1984 breakup of the Bell System, to be Nynex Corp. and Bell Atlantic Corp. The two regional phone companies combined their cellular businesses last year and have discussed a broader relationship. But they had no comment Monday in the wake of the SBC-Pacific Telesis deal.
Brian Adamik, senior analyst at the Yankee Group, a Boston telecommunications consulting firm, predicts the advent of “supercarriers”--a few huge firms that will provide one-stop telecommunications shopping for consumers, including an array of services such as Internet access, paging, cellular, local, long-distance and interactive entertainment and information.
“This might break the logjam,” Adamik said. “It will serve as the test bed to see what types of obstacles and land mines come up as Baby Bells start to merge. We fully expect to see more of this down the road.”
Consumer activists are not enthusiastic. “It’s sort of like son of Ma Bell,” said Bradley Stillman, communications director for the Consumer Federation of America. “Let’s just hope it doesn’t come to the painful act of Divestiture II, because that’s a very bad and difficult situation for the public to be in.”
Still, said Jeff Cole, director of UCLA’s Center for Telecommunication Policy, “It certainly moves back in the direction that the 1984 consent decree moved against. But what’s going to impact the consumer is that there’s going to be so much competition coming anyway, they’re still going to have a wide choice of providers.”
Quigley and Whitacre said they began talking about a possible merger during the joint lobbying effort by the Baby Bells to get the telecommunications reform bill passed. About a month ago, they met in a Phoenix airport hangar--a midway spot between San Antonio and PacTel headquarters in San Francisco--to discuss the deal. A second meeting in the same place cemented it.
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The combined company will use SBC’s name and be based in San Antonio--although PacTel’s phone units, Pacific Bell and Nevada Bell, will retain their current headquarters.
Under the terms of the deal, PacTel shareholders will get 0.733 of a share of SBC stock for each of their shares. At the same time, PacTel, which surprised Wall Street last month by leaving its stock dividend intact, said Monday it will cut its second-quarter payout 42%, to 31.5 cents a share.
In New York Stock Exchange trading, SBC’s stock tumbled $2.75 to $49.875. PacTel shares rose $6 to $33.75.
What will happen to SBC’s and PacTel’s competing video ventures, Tele-TV and Americast, is still unresolved. But together, they will continue to provide the main phone service in California and Texas, develop complementary wireless operations and start a long-distance business, which will be headquartered in San Francisco.
The merger is designed to be transparent to consumers, although both companies say they hope to bring new services to market more quickly as a result of their combined expertise. But the analysts said that for California customers, whose phone company will now be run from San Antonio, the psychological impact could be significant.
“I can imagine the cartoons that will come out, showing a Texan with tumbleweed hanging out of his mouth sitting on top of the California phone company,” said analyst Adamik.
SBC, formerly called Southwestern Bell, changed its name last year as a way of swapping its regional phone company identity for a more inscrutable global acronym.
“Southwestern Bell brings up images of Arkansas and Missouri,” said Dan Miller, an analyst at Opus Research. “So they clearly are sensitive to issues of brand. I would hope they’d keep the Telesis . . . logo.”
In other ways than image and brand, industry observers said, PacTel’s strategy and management would be likely to have an important influence on the newly combined company.
“I think Pac Bell is going to have a tremendous influence on the corporate culture there,” said Peter Krasilovsky, senior analyst at Arlen Communications in Bethesda, Md. “Pac Bell has been much more forward-looking and technically innovative, and I think you’re going to see them lead in those areas.”
But in both image and substance, the merger may be the equivalent of the regional Bell companies walking away from the ubiquitous Ma Bell logo after the historic breakup. That signified the real end to the AT & T monopoly. This, analysts say, signals the end of the local phone company as we have known it.
And if California customers don’t like it?
“That’s one of the things about telecommunications reform,” said analyst Ellis. “If customers aren’t happy with PacTel service as managed by a San Antonio company, they’ll always have another choice.”
* CONSUMER IMPACT
Basics of the deal explained. D1.
* RELATED STORIES. D1, D3-D5
(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)
Joining Forces
THE NEW PACKAGE
Deal’s value: $16.7 billion
New company’s name: SBC Communications Inc.
Employees: 100,000
THE IMPACT
On consumers: Prices could fall long-term as long-distance companies enter local markets.
On employees: SBC says it will create 1,000 new jobs in California. Pacific Telesis is in the process of cutting back, so net change is unclear.
On the companies: The deal gives SBC a gateway to lucrative Asian markets. Also, by joining forces, the Baby Bells will be better able to complete with long-distance giants such as AT&T.;
