GTE May Join the Merger Bonanza : Analysts See Long-Distance Relationship With Foe AT

GTE, the nation’s largest local phone service provider, has remained quietly on the sidelines as the competitive landscape in the telecommunications industry has been transformed by a series of mega-mergers.

But the same forces that propelled the recent proposed mergers of Pacific Telesis and SBC Communications, and Nynex and Bell Atlantic, may well drive GTE to seek a partner, analysts say. Rather than ally with another local phone company, however, GTE is more likely to join forces with a long-distance company--possibly even its historical rival, AT&T.;

The reason for the different set of priorities is simple: The Baby Bell companies, such as Pacific Telesis, believe they need to be bigger and more geographically diversified to compete effectively in long-distance service and other national businesses.

But GTE, which is not a regional Bell company, is already national, with local phone and cellular businesses scattered across 28 states. And it would be only slightly smaller than the two companies that would result from the two proposed Bell mergers.

Furthermore, because it was never a part of the old Bell system and thus was not subject to the same legal restrictions as the Baby Bells, GTE is not required to fulfill a long checklist of conditions regarding competition in the local market before it can enter long-distance.

Indeed, GTE already offers long-distance service in six states through an agreement with WorldCom, the nation’s fourth-largest long-distance company, and it plans to expand to all 28 of its local-calling markets by the end of the year. That is “light years quicker” than the Bells could switch on long-distance, said David J. Boczar, an analyst at Value Investing Partners, a Westport, Conn., securities research firm.

GTE President Kent Foster said the opportunities in long-distance and other new markets outweigh the new dangers in the local phone business, where GTE will now face a host of competitors. Among them will be Pacific Bell, which has four times as many local phone lines in California than GTE and will soon be angling for customers in GTE territory.

Foster thinks GTE can capture 25% of the long-distance business in markets it serves. And he’s even more optimistic about the company’s fledgling cable TV business, which he believes can capture 30% of the market in its telephone service areas. GTE has a cable television network under construction in Ventura County and another in Tampa Bay, Fla.

The plan is for GTE to deliver cable TV to 7 million to 10 million homes by the turn of the century.

But accomplishing all of this will be far easier with a deep-pocketed long-distance partner--and that’s where the speculation about AT&T; comes in. Rather than combining with another local phone firm, a GTE alliance with AT&T--or; perhaps MCI or WorldCom--would give both companies something they lack.

AT&T; has said it wants into the local phone business, but it needs wires into homes and businesses. Leasing facilities from the Baby Bells and GTE will be the short-term solution, but eventually it will want its own network--and an acquisition of GTE, or some other kind of alliance, would give it a good jump-start in that respect.

For GTE, such a deal would involve it with the world leader in long-distance and give it the financial clout to better defend itself against the competitive onslaught coming to its turf.

All of this is especially critical in California, which is GTE’s largest single market and is expected to be the fiercest battleground for the deregulated communications companies.

“California tends to be a trendsetter, a standard setter,” Foster said. “I would say that California will be more competitive than any because it is so attractive.”

Not surprisingly, Foster won’t discuss the possibility of a merger. And a deal is by no means a certainty. GTE has traditionally been more conservative and slower to react than many of the Baby Bells--for better and for worse. A few years ago, when phone-cable company merger deals were all the rage, GTE didn’t jump into the fray. When those deals fell apart, GTE looked smart.

Now that a new merger frenzy is underway, GTE again appears to be biding its time. “Everyone is sort of panicking,” said Chandan Sarkar, an analyst at Fahnestock & Co. “GTE refuses to panic.”

With it’s local phone business, nascent long-distance service and a strong presence in cellular--GTE Mobilnet claims 10% of the cellular market nationwide--GTE’s broader goal is to become a one-stop supplier for a broad range of communications needs.

But with other telecommunications companies planning similar strategies, GTE’s real mission will be to become the most customer-friendly company around--and that’s something it hasn’t exactly won accolades for in the past.

GTE California President M.L. “Red” Keith Jr. contended that the service problems that dogged the company in the ‘70s and ‘80s have long since been fixed. The challenge now, he said, is to better communicate that to the public.

GTE’s California operations, based in Thousand Oaks, are also involved in several projects intended to broaden the phone company’s role and bolster its image as a cutting-edge concern. They include a host of deals involving the entertainment industry.

The company will install and operate a state-of-the-art communications network at the Playa Vista development that will house the new DreamWorks SKG movie studio. GTE has a Santa Monica facility that produces programming for interactive media and offers film and TV producers access to technology for creating digital background scenes. And it has joined the Americast consortium, with partners Walt Disney Co. and three Bell companies, that will supply programming for the phone companies’ new video networks.

GTE is also pursuing growth in international markets. Its foreign phone operations are now primarily confined to North and South America, but it’s moving into the huge China market, and hopes eventually to break into Europe.

But analysts say that GTE’s efforts at redefining itself hinge on its ability to connect with consumers in a way that telephone companies rarely did when they were regulated monopolies. In this new environment, “much more important than size is going to be reaction time, and sensitivity to the market, to customers and to competitors,” said Frank Governali, an analyst at CS First Boston.

As the competition unfolds over the next year or two, said analyst Linda Meltzer at UBS Securities, GTE will be “operating from a position of strength and will probably be attractive to a lot of potential partners.”