Bell Atlantic, GTE Having Merger Conversation

The Bell Atlantic Corp. and GTE Corp. merger talks represent the latest attempt by the Baby Bells to make an end run around tough federal rules governing their entry into the long-distance telephone market.

Sources say the companies are close to a merger agreement that would create a telecommunications company with control of one-third of the U.S. local phone market.

Bell Atlantic is one of the regional companies spun off by AT&T; in 1983, and it has operations in 13 states on the Atlantic Coast. GTE, which is not a Baby Bell company, provides local, long-distance, data and Internet services. A combined company would offer services in 41 states.

By law, Baby Bells cannot offer long-distance service in their home regions unless they fully open their core local phone markets to competition. GTE, of course, is exempt from such a restriction. So far, the Federal Communications Commission has rejected long-distance applications from all four Baby Bells, saying the companies had not opened their markets.

Combining Bell Atlantic and GTE would be beneficial for a number of reasons, analysts said. GTE is established in long-distance service, and Bell Atlantic would be able to jump-start its fledgling data and Internet business with GTE’s network. GTE also offers access to the lucrative East Coast market and a link with Bell Atlantic’s global fiber-optic network.

“This deal doesn’t really change anything for consumers,” said Jim Freeze, senior telecom analyst at Forrester Research in Cambridge, Mass. “What it will do is just create a bigger” Bell company.

Bell Atlantic and GTE both declined to comment.

Any combination of Bell Atlantic and GTE would need approval from the Justice Department, the Federal Communications Commission and state regulators.

A deal would also bring foreign scrutiny because GTE owns the local telephone system in the Dominican Republic and is a majority investor in Venezuela’s national phone company.

Another issue that may raise U.S. antitrust concerns is the fact that the same company would serve GTE’s 4.6 million wireless customers and Bell Atlantic’s 5.4 million subscribers. Under the deal, Bell Atlantic would also absorb GTE’s more than 1 million local telephone subscribers in Virginia and Pennsylvania unless regulators force the companies to divest GTE’s local phone operations in those states.

Stock traders noted that the uncertainty about regulators’ opinions and the possibility that concessions will be required were concerns on Wall Street, and both companies’ stocks declined. In New York Stock Exchange trading, GTE shares plunged $2.19 to close at $55.75, and Bell Atlantic shares eased 19 cents to close at $45.

Still, some legal experts believe the deal has a fighting chance. Antitrust authorities in recent years have approved a string of blockbuster telecommunications deals, including Bell Atlantic’s $25.6-billion purchase of Nynex Corp. in 1997, and SBC Communications’ $16.6-billion acquisition of California’s Pacific Telesis Group the same year.

“The FCC will have a good look at this, no question about it. But I don’t think the obstacles are that huge,” said Jack Clarke, the former general counsel who helped negotiate the Nynex-Bell Atlantic merger two years ago.

Analysts noted that the Bell Atlantic-Nynex merger was approved by the FCC only after the companies made concessions to foster competition.

At one time, British Telecom was seen as a potential partner for either Bell Atlantic or GTE. Instead, BT on Sunday announced plans for an international venture with AT&T.;