Bell Atlantic, GTE Plot Merger's Future

Bell Atlantic, GTE Plot Merger's Future
By Rebecca Cantwell, Inter@ctive Week
July 3, 2000

The creation of Verizon Communications as the nation's largest local phone company will be a work in progress for years, but look for the promotional blitz to start soon and for the bills of two phone companies to have a new logo this summer.

Bell Atlantic (www.bellatlantic.com) and GTE (www.gte.com) face a host of challenges as they start to knit most of their businesses together, while complying with complex regulations to shed others to win approval for their $65 billion merger.

"It's time to roll up our sleeves and get the organizations in place to do all the things we said we were going to do," says Bell Atlantic spokesman Bob Varettoni.

Among the most immediate plans: launch the Verizon brand for the entire new company. Through a quirk of timing, the Verizon Wireless (www.verizonwireless.com) venure closed earlier this year and already has declared itself to the world. Two separate brand launches were not in the grand plan, but the company intends to make up for any confusion thus far with a major Verizon advertising campaign that will familiarize the nation with the name by the year's end.

Customer bills with the Verizon logo are expected to hit the mail later this summer, and the top priority for integrating thousands of systems is on those systems that touch customers most directly.

"Several thousand technicians have been working to bring billing and operational systems in sync to be one system as soon as possible," Varettoni says. "When you move from New York to Texas, you want to make one call to a customer service rep and know those records are coordinated."

Immediate plans also include making the 260,000 employees of the two companies feel part of the Verizon family. Launch celebrations are planned for the workers, with nearly 100 executives from both companies slated to participate. Plans are to "cross-pollinate," with Bell Atlantic executives going to GTE celebrations and vice versa.

Under the public face lies an enormous challenge of integrating the companies.

Verizon's wireline operations include dominance in Bell Atlantic's 14-state Eastern territory and will reach a third of U.S. households, serving two-thirds of the top 100 markets and nine of the top 10. The combined company controls more than 63 million access lines and the equivalent of 32 million additional access lines in high-speed data circuits.

Verizon's new wireless venture is by far the nation's largest. It serves about 25 million wireless customers and nearly 4 million paging customers. Its nationwide footprint will cover more than 90 percent of the U.S. population and 96 of the top 100 U.S. wireless markets.

That kind of market power is a big reason why the Federal Communications Commission (www.fcc.gov) took 19 months to approve the deal.

Bell Atlantic took a break last year while it focused on winning approval to enter the New York long-distance market, this year becoming the first regional Bell to succeed in jumping through all the regulatory hoops. Some of the conditions proposed by the companies and imposed by federal regulators came out of the New York experience, and others are based on the template of the recent mega merger of SBC Communications and Ameritech.

Mike Balmoris, an FCC spokesman, says the conditions were designed to encourage more competition in the new company's existing region and to provide incentives for expansion.

Receiving the most scrutiny, discussion and debate was the requirement that the company spin off most of GTE's Internet backbone business into Genuity (www.genuity.com), holding only 9.5 percent until it proves it has opened Bell Atlantic's local markets to competition.

Perhaps more complex will be the separation of the data businesses — which include Bell Atlantic's frame relay, Asynchronous Transfer Mode (ATM), Internet Protocol and wholesale Digital Subscriber Line businesses — from the basic phone service.

"The biggest challenge is that we are effectively divesting an operating business that uses shared systems and assets," says John Cullina, general counsel at Bell Atlantic Network Data, which will become Verizon Data Solutions.

The new data affiliate must develop new systems for entering service orders, provisioning service and billing that share no information with the parent.

"We have to go through a process of inventorying existing equipment and customers, and transforming those databases to look like a DLEC [data local exchange carrier]," says George Dowell, vice president of strategic planning at the new data affiliate.

A separate data unit was required as part of Bell Atlantic's entry into the New York long-distance market, which will start operating this month. That effort will have to be duplicated nationwide.

"In a sort of perverse way, having to do New York in an abbreviated timeframe will help," Dowell says. "We've uncovered a lot of the process issues, and we'll be able to learn from it."

He estimates that the cost of buying equipment and providing connectivity, computers and operating systems for the new affiliate will top $100 million.

"It's going to be a lot of work, but it will also give us an opportunity to implement systems that will enhance our flow-through, so when we're done, provisioning and maintaining our ATM and frame relay network will be easier," Dowell says.

While the FCC conditions give Verizon a chance to reintegrate the affiliate in the future, Dowell thinks that would be nearly impossible.

Beyond the data issues, the FCC stated requirements for how Verizon is to open its markets to competition:

It must meet performance goals for Bell Atlantic states, showing it responds properly to competing carriers' requests for information and interconnection, or pay the government $1.16 billion over three years.

Verizon must work with competitors to put in place application-to-application in terfaces, graphical user interfaces and business rules that are uniform in both Bell Atlantic's and GTE's territories.

For competitors with annual revenue of less than $300 million, Verizon must provide special assistance, including free training on using the systems. It must offer competitors an interconnection or resale agreement that covers multiple states.

An independent auditor will examine whether the merged company is in compliance on colocation, unbundled network elements and line sharing.

Many of the competition conditions, including the audit, are based on provisions developed for the SBC-Ameritech merger. But conditions designed to spur competition elsewhere use a different approach.

Within 36 months of the merger's close, Verizon has agreed it will spend at least $500 million to provide competitive local service, or actually provide local service to at least 250,000 out-of-region customers. The company faces payments of up to $750 million if it fails.

Other conditions on the merger include a ban on charging residential customers a minimum monthly flat charge for long-distance service.

The carrot that the FCC offers Verizon is getting back its Internet backbone in five or six years — or possibly sooner. The company's goal is two years.

 

The Bell Atlantic-GTE Merger: A Tasty Carrot Hangs on this Stick

Elstrom is a senior writer for Business Week in New York

The FCC has an innovative plan that will give Bell Atlantic a strong incentive to open up its local markets

When Bell Atlantic Corp. and GTE Corp. unveiled plans to merge back in July, 1998, a sharp outcry followed. Deregulation of the telecom industry was supposed to bring more competition to local-phone markets, so that consumers and businesses could choose among a variety of carriers. Regulators and consumer advocates openly wondered how a megamerger between two local-phone giants would achieve this goal.

Even the normally reserved chairman of the Federal Communications Commission, William E. Kennard, questioned whether the deal could win approval from the FCC and state regulators. "I hope the parties will demonstrate how the merger advances [competition]," he said at the time.

Nearly two years later, Bell Atlantic and GTE are close to completing a successful demonstration. Kennard and the FCC are expected to give tentative approval for the merger as early as the week of May 15, according to two sources close to the negotiations. Why has Kennard come around? A close look at the latest FCC filing from Bell Atlantic and GTE reveals the answer: To get their deal done, the two companies are agreeing to painful concessions that should speed up customer choice in local-phone markets. And that's a positive development.

Here's the crux of the negotiation: GTE owns an Internet business, called Genuity, that carries Net traffic across the U.S. and hosts Web sites for corporations. The operation is booming, with revenues that are projected to soar from $1 billion in 1999 to $4.1 billion in 2003, according to Sanford C. Bernstein & Co. But the two companies can't hold on to Genuity because it's considered a long-distance business and Bell Atlantic isn't allowed into the long-distance business until it proves to the FCC that it has opened up its local markets. Under current telecom laws, the combined Bell Atlantic and GTE can own only 10% of Genuity.

"PRETTY TOUGH." So Kennard and the two companies have come up with an innovative solution. Bell Atlantic and GTE will give up control of Genuity for at least several years. But if Bell Atlantic meets strict benchmarks for opening up its local markets, the companies will be able to regain control of it. Specifically, they'll be able to boost their stake in Genuity to 80%, from the 10% level they'll have after the spin-off.

The agreement should prove effective because the penalties for not meeting these benchmarks are severe. If Bell Atlantic doesn't open at least 50% of its markets within five years, the two companies completely forfeit any chance to have an equity stake in Genuity -- a loss of about $7 billion in value. If within five years Bell Atlantic opens more than 50% but less than 90% of its local markets, the two companies will also lose their option to regain control of Genuity, however the FCC would see that they're compensated for the loss of their existing equity. "The FCC is asking for some pretty tough penalties," says Scott C. Cleland, an analyst with Legg Mason Inc.'s Precursor Group.

Rivals aren't satisfied. AT&T and other competitors argue that, under the current proposal, Bell Atlantic and GTE aren't really giving up control of Genuity at all. Their contention: The two companies' so-called option to buy back up to 80% of Genuity isn't really an option, because it is completely within their control. "The conversion feature is virtually riskless because it requires only a good-faith effort by Bell Atlantic," says John C. Coffee Jr., a Columbia University Law School professor who is working for AT&T.

But that's precisely the point. The current deal will give Bell Atlantic strong incentives to open up its local markets. Even beyond its revenues, the Genuity business is extremely important strategically to Bell Atlantic and GTE. To compete against the likes of MCI WorldCom, the pair needs to be able to offer its corporate customers a full suite of communications services. Internet services are a key component of what corporations are looking for these days. With Genuity as leverage, Kennard seems to have found an effective way to give consumers and businesses a better choice of phone companies.

From: Verizon 2000 Annual Report

On June 30, 2000, Bell Atlantic and GTE completed a merger under a definitive merger agreement dated as of July 27, 1998 and began doing business as Verizon Communications. The merger qualified as a tax-free reorganization and has been accounted for as a pooling-of-interests business combination. Under this method of accounting, Bell Atlantic and GTE are treated as if they had always been combined for accounting and financial reporting purposes. As a result, we have restated our consolidated financial statements for all dates and periods prior to the merger to reflect the combined results of Bell Atlantic and GTE as of the beginning of the earliest period presented.

In August 1997, Bell Atlantic and NYNEX completed a merger of equals under a definitive merger agreement entered into on April 21, 1996 and amended on July 2, 1996. The merger qualified as a tax-free reorganization and has been accounted for as a pooling-of-interests.

Merger-Related Costs
Direct Incremental Costs

Direct incremental costs related to the Bell Atlantic-GTE merger of $472 million ($378 million after-tax, or $.14 per diluted share) include compensation, professional services and other costs. Compensation includes retention payments to employees that were contingent on the close of the merger and payments to employees to satisfy contractual obligations triggered by the changes in control. Professional services include investment banking, legal, accounting, consulting and other advisory fees incurred to obtain federal and state regulatory approvals and take other actions necessary to complete the merger. Other includes costs incurred to obtain shareholder approval of the merger, register securities and communicate with shareholders, employees and regulatory authorities regarding merger

Employee Severance Costs

Employee severance costs related to the Bell Atlantic-GTE merger of $584 million ($371 million after-tax, or $.14 per diluted share), as recorded under Statement of Financial Accounting Standards (SFAS) No. 112, “Employers’ Accounting for Post-employment Benefits,” represent the benefit costs for the separation of approximately 5,500 management employees who are entitled to benefits under pre-existing separation plans, as well as an accrual for ongoing SFAS No. 112 obligations for GTE employees. Of these employees, approximately 5,200 were located in the United States and approximately 300 were located at various international locations. The separations either have or are expected to occur as a result of consolidations and process enhancements within our operating segments.

Transition and Integration Costs

In addition to the direct incremental merger-related and severance costs discussed above, from the date of the Bell Atlantic-GTE merger, we expect to incur a total of approximately $2.0 billion of transition costs related to the Bell Atlantic-GTE merger and the formation of the wireless joint venture. These costs will be incurred to integrate systems, consolidate real estate, and relocate employees. They also include approximately $500 million for advertising and other costs to establish the Verizon brand. Transition costs related to the Bell Atlantic-GTE merger were $694 million ($316 million after taxes and minority interests, or $.12 per diluted share) in 2000.

In connection with the Bell Atlantic-NYNEX merger, we recorded transition costs similar in nature to the Bell Atlantic-GTE merger transition costs of $205 million ($126 million after-tax, or $.05 per diluted share) in 1999 and $196 million ($121 million after-tax, or $.04 per diluted share) in 1998.

 

FOR IMMEDIATE RELEASE:                           NEWS MEDIA CONTACT:

June 16, 2000                                                                       Mike Balmoris at (202) 418-0253

                                                                                             Email:   mbalmori@fcc.gov

 

 

FEDERAL COMMUNICATIONS COMMISSION APPROVES

BELL ATLANTIC-GTE MERGER WITH CONDITIONS

 

Required Spin-Off of GTE’s Internet Assets Increases Incentives for Bell Atlantic to Swiftly Open its Local Phone Territory to Competitors

 

Washington, D.C. – Today, the Federal Communications Commission (FCC) approved applications to transfer control of FCC licenses and lines from GTE Corp. (GTE) to Bell Atlantic Corp. (Bell Atlantic), subject to enforceable merger conditions and spinning off substantially all of GTE’s nationwide Internet business into a separate public corporation.  The 25 merger conditions are designed to enhance local phone competition in the markets in which Bell Atlantic or GTE is the incumbent local exchange carrier (incumbent LEC), strengthen the merged company’s incentives to enter local phone markets outside of its territories, and promote equitable and efficient advanced services deployment. 

 

To ensure that the transaction does not violate the Telecommunications Act prohibition on providing long distance services without the necessary authorization, Bell Atlantic and GTE voluntarily proposed to spin-off GTE’s Internet assets and offered a set of pro-competitive conditions. 

 

Internet Assets Spin-Off

To comply with section 271 of the Telecommunications Act, the merged company will transfer substantially all of GTE’s Internet business into a separate public corporation to be known as Genuity (formerly GTE Internetworking).  This section of the Act forbids a Bell Operating Company, such as Bell Atlantic, from providing long distance voice or data services to customers in its service territory before it demonstrates that its local phone market is open to competitors.  To date, Bell Atlantic has only received authorization to offer long distance services in New York state. 

 

Under the ruling adopted today, Bell Atlantic cannot convert its permissible 10% interest in Genuity into a greater equity ownership unless it receives long distance approvals covering 95% of its region where Genuity operates within five years. 

 

 

--  more  --

 

Additionally, the merged company will not receive any economic benefit from the long distance services of Genuity for those states in which Bell Atlantic is restricted from providing long distance services.  Specifically, the merged company will give to Genuity shareholders any gain in Genuity’s value that is attributable to Genuity’s operations in states during the period of time in which the combined company is restricted from offering long distance services.  This provides a powerful incentive for Bell Atlantic to accelerate its efforts to open its local phone markets to competitors (see attached fact sheet for additional details of the Internet spin-off).

 

Merger Conditions

The merger conditions are designed to accomplish the following five public interest goals:

 

1)      promote advanced services deployment;

2)      enhance the openness of the merged company’s in-region local telecommunications markets;

3)      foster out-of-region local competition;

4)      improve residential phone service; and,          

5)      provide for enforcement of the merger.

Absent the merger conditions, the merger would likely lead to the following public interest harms:

1)      The merger would remove one of the most significant potential participants in local telecommunications mass markets within Bell Atlantic’s existing territory.

2)      The merger would reduce the Commission’s ability to implement the market-opening requirements of the 1996 Act through comparative practice oversight (benchmarking) methods.

3)      The merger would increase the incentive and ability of the merged entity to discriminate against its rivals, particularly with respect to the provision of advanced telecommunications services.

 

Wireless Issues

The FCC’s Order finds that the merger of the companies’ wireless operations would be pro-competitive and grants the companies’ applications to transfer control of GTE’s wireless licenses to Bell Atlantic on the condition that they comply with the Commission’s cellular cross-ownership and CMRS spectrum cap rules.  Absent divestiture, the merger of Bell Atlantic and GTE would create nearly 100 overlaps under these rules.  A number of these overlaps will be resolved by the recently approved sale of properties to ALLTEL.  The companies have informed the Commission that negotiations to sell the remaining properties are proceeding, and that additional filings are imminent.  Certain properties, however, will be placed in trust for purposes of divestiture to third parties, and applications to place properties in trust are on file with the Commission.

 

 

International Issues

The FCC’s Order also finds that the public interest will be served by transferring control of GTE’s international section 214 authorizations to Bell Atlantic, subject to the condition that the merged company’s subsidiaries be classified as dominant international carriers in their provision of service on the U.S.-Gibralter, U.S.-Dominican Republic, and U.S.-Venezuela routes.

 

Action by the Commission June 16, 2000, by Memorandum Opinion and Order (FCC 00-221). Chairman Kennard, Commissioners Ness, and Tristani with Commissioner Furchtgott-Roth and Powell concurring in part and dissenting in part. Commissioners Ness, Furchtgott-Roth, Powell and Tristani issuing statements.

 

CC Docket No. 98-184

 

-FCC-

 

Common Carrier Bureau contacts: 

Johanna Mikes at (202) 418-1535 or Julie Patterson at (202) 418-1381.

 

 

 

Telecom
FCC Reportedly Set to Approve Bell Atlantic, GTE Merger
By Tim Arango
TheStreet.com/NYTimes.com Staff Reporter
6/15/00 12:11 PM ET
URL: http://www.thestreet.com/brknews/telecom/961768.html

Updated from 7:47 a.m. EDT

Federal regulators are set to give their blessing to the planned merger of Bell Atlantic (BEL:NYSE) and GTE (GTE:NYSE), creating the largest local phone company in the country, the Washington Post reported Thursday.

According to the report, four of the five commissioners on the Federal Communications Commission indicated Wednesday that they would support the deal. The anticipated merger was announced two years ago. A decision will likely be announced either Thursday or Friday, according to a source close to the process.

The combined company, which will be called Verizon Communications, would control about 63 million telephone lines in 31 states, approximately one-third of the total lines in the U.S. The deal will add GTE's 4 million wireless customers to Verizon Wireless, the venture formed last year by New York-based Bell Atlantic and Britain's Vodafone AirTouch (VOD:NYSE), which is already the nation's largest wireless operator.

To satisfy regulators, Irving, Texas-based GTE agreed to spin off its Internet infrastructure company, Genuity, through a forthcoming initial public offering.

The combined company will have a market capitalization of close to $150 billion, with $60 billion in revenue while employing 260,000 people.

Dave Frail, a spokesman for Bell Atlantic, said, "We believe we have addressed all concerns raised by the FCC, and we are confident we can complete a deal by the end of the month."

Bell Atlantic shares were down 5/16, or 1%, at 57 1/16, while GTE shares were up 1/4 at 69 in midday trading. (Bell Atlantic closed down 13/16, or 1%, at 56 9/16 while GTE finished up 115/256, or 1%, at 69 51/256.)

 

Execs profit handsomely from Bell-GTE deal

By John Borland
Staff Writer, CNET News.com
April 13, 1999, 6:55 p.m. PT

Bell Atlantic released new details of its merger with GTE, including word that GTE's CEO stands to make close to $14 million in bonuses following the deal.

After the merger, GTE CEO Charles Lee and Bell Atlantic CEO Ivan Seidenberg will share the top spot in the new company for two years. Each will receive multimillion-dollar payments as incentive to stay with the firm.

The GTE CEO stands to make a considerable sum of money if the merger goes through. As part of the agreement, Lee will be given a $4 million bonus for staying on board after the deal is completed, and could earn an "incentive" bonus, capped at $10 million, that is tied to the performance of the stock.

These bonuses will be added to Lee's annual base salary of at least $1.25 million per year, and other pre-existing bonus packages that will total close to $10 million.

Seidenberg also will receive a "retention bonus" of more than $10 million.

If he leaves, Lee will likely be able to keep the $10 million incentive bonus. Both executives would forfeit their retention bonuses if they jump ship to another company.

Separately, Bell Atlantic plans to break up the wireless phone joint venture it operates with AirTouch called PrimeCo PCS. (See related story)

Lee will serve as chairman, Seidenberg as president, and both will share a co-CEO title until June of 2002. At that time, Lee will retire, and Seidenberg will take the full CEO duties, the company said.

Lee will continue to serve as chairman for another two years, after which Seidenberg will also step into that position.

The salary details were contained in a merger proxy statement with the federal Securities and Exchange Commission today, in advance of a shareholder vote on the merger scheduled for May 18.

In the filing, the two companies spun out their rationale for the merger, saying that they need to grow larger in order to compete in a national and international telecommunications market.

The proxy statement also spun out details of how the agreement between the two companies evolved.

The merger talks apparently began in an early June 1998 meeting between executives of the two companies.

Executives and directors slowly analyzed the benefits of a merger over the next two months, before having their hand tipped by growing rumors late in July. According to today's filing, a pending newspaper report on the deal prompted them to speed up their timetable late in that month, and the deal was finally announced two days later on July 28.

The companies said they expected to see between $1.2 billion to $1.6 billion in transition costs over the next three years. But this would be made up by close to $4 billion in annual savings and new revenues, they said.

The deal has yet to be approved by federal and state regulators, and officials at the FCC have been skeptical of a similar pending merger between SBC Communications and Ameritech.

The company hopes to have the deal approved and completed by the end of 1999, but said regulatory approval could push back the finish line to the first half of 2000, the filing said.

GTE shareholders will meet on May 18 to vote on the deal. Bell Atlantic stockholders will cast their own votes the following day.