GTE in Fight for MCI; Offers $28 Billion
Muscling into the biggest takeover battle in history, GTE Corp. offered $28 billion in cash Wednesday for ownership of long-distance giant MCI Communications Corp.
The combination of GTE and MCI would create a telecommunications behemoth with $40 billion in annual revenue and a network that would reach 24 million long-distance and 21 million local customers.
The deal would give GTE the broadest geographic base in the industry, positioning it at the forefront of the booming telecommunications industry, at the same time it has moved aggressively to grab a share of rapidly expanding Internet business.
GTE’s bid comes two weeks after little known Jackson, Miss.-based WorldCom Inc. offered a $29.4-billion stock swap for MCI and an even earlier bid of $20.3 billion in stock and cash from London-based British Telecom.
After saying little about the bidding war around it in recent days, MCI issued a terse statement late Thursday that it would “review all issues and options” involving the competing offers. Some analysts, however, believe the firm may prefer the GTE cash offer, worth $40 per share, to WorldCom’s stock.
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GTE would have to borrow massively to afford the deal, though executives denied that the purchase would leave the firm overburdened with debt. As word of the deal leaked out Wednesday, GTE stock fell $2.18 to $48, while MCI shares rose $1.56 to $36.87.
If GTE, headquartered in Stamford, Conn., succeeds in acquiring MCI, the deal would rank as the largest cash deal in history, eclipsing RJR Nabisco Inc.’s $25-billion sale in 1989.
GTE Chairman Charles R. Lee confirmed that his firm was making the offer after stock markets closed Wednesday, saying in a letter to MCI Chairman Bert C. Roberts that it would “bring the benefits of competition to all markets and all customers, both nationally and globally.”
Until recently, GTE, an old-line phone company founded 79 years ago in Wisconsin, had been widely regarded as a slow-moving and lackluster performer in an industry full of mavericks, such as WorldCom. A merger would force GTE to accommodate the flashier, more entrepreneurial style of MCI, whose in-your-face marketing campaigns have provoked scores of industry rivals.
“GTE is not the quickest company to the draw,” said Mark Warner, a telecommunications venture capitalist who ran unsuccessfully for the U.S. Senate in 1996. “If there wasn’t the WorldCom offer blazing the trail, I doubt if they would have made a bid for MCI. . . . They usually operate in a more cautious mode.”
But Lee has been on a campaign to position GTE for a boom in use of the Internet and wireless telephones. During the last year, the company has added about 200,000 Internet subscribers through its $616-million acquisition of Cambridge, Mass.-based BBN Corp., whose computer network forms part of the Internet’s electronic foundation. GTE has also signed up 1.5 million subscribers for its long-distance telephone service.
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GTE, the nation’s third-largest local telephone company, offers local phone service in California, Florida, Texas and 24 other states in the Midwest and West.
Unlike the regional Bell operating companies, GTE is in an enviable position of being exempt from regulatory restrictions requiring proof that its local markets are open to competition before entering the long-distance business.
But financial experts, noting that GTE had just $949 million in cash on hand as of June 30, question whether the company can deliver inexpensive, innovative phone service if it has to raise tens of billions of dollars to consummate its offer for MCI.
“The structure of the transaction is likely to debt-laden GTE, which will make it a little bit tougher to compete,” said Thomas H. Sullivan, a partner in the Washington telecommunications law firm of McDermott, Will & Emery.
GTE President Kent Foster rejected such claims, saying the combined GTE and MCI would have huge cash flow--more than enough to price telephone services competitively.
He said the deal would be accomplished “through bank financing and issuing public debt. This is simply another way to structure your debt equity. We will not have any problems generating income.”
GTE is not likely to face insurmountable antitrust objections from federal officials, according to experts. But the company has spearheaded challenges of telephone industry regulation in federal and state courts and could face a potentially hostile review by the Federal Communications Commission.
“From an antitrust point of view, GTE and MCI overall present a fairly favorable competitive picture,” said Leonard J. Kennedy, a veteran Washington communications lawyer, who represents several phone companies. “But they face potentially huge regulatory and political problems since they have been the principal litigant against the FCC and its policies.”
Foster does not believe GTE faces an uphill regulatory battle.
“But I think the regulators will analyze this deal and approve it on its merits because it creates a very powerful competitive situation,” Foster said.
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MCI publicly has been supporting British Telecom’s $20.3-billion offer over WorldCom’s competing bid, despite the prospects that its shareholders may vote down the deal. MCI would face financial penalties if it fails to support the BT offer.
“The folks over at MCI have got to be smiling--folks are telling me they are impressed with the GTE offer,” said Jeffery Kagan, who heads his own Atlanta telecommunications consulting firm. “GTE is a very big, strong, profitable local telephone company that could use MCI’s marketing expertise to steamroll into the local telephone markets across the country.”
But consumer advocates cautioned that a GTE-MCI combination could reduce competition, since those companies are battling each other in the local and long-distance markets in California and elsewhere. That could delay the day when consumers see lower prices as competitors offer better deals in order to win customers.
“These companies have been going at each other’s throats trying to get into each other’s markets, and if they merge, that stops,” said Regina Costa, telecommunications research director for TURN, the Utility Reform Network in San Francisco.
The continued upheaval in the $600-billion telecommunications industry has compelled more communications companies to seek out partners that can help erect vast global networks with the capacity to cope with the burgeoning voice, video and data demands of the global Information Age.
Since Congress passed a sweeping reform law in 1996 aimed at spurring phone competition and lowering prices, the industry has been gripped by a wave of consolidation.
The megadeals include the $22-billion merger of Bell Atlantic Corp. and Nynex Corp. and the $15.7-billion combination of SBC Communications Inc. and Pacific Telesis Group. Even GTE was briefly targeted as a takeover candidate by long-distance giant AT&T; Corp.
As a result of GTE’s acquisition earlier this year of BBN Corp., a rival of WorldCom’s UUNet Technologies subsidiary, the combination of MCI and GTE would create a major force on the Internet, with control over a huge portion of the global computer network’s “backbone,” the electronic trunk lines linking Web users from coast to coast in the U.S.
GTE is the second-largest local phone service provider in California.
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Times staff writer Karen Kaplan contributed to this story.
