GTE Corp., the nation's second-largest phone company, announced plans today to enter the long-distance telephone business by buying all of Southern Pacific Co.'s communications operations for about $750 million in cash.
If approved by federal regulators, the transaction would add Southern Pacific's discount long-distance Sprint service and satellite business to GTE's $21 billion telecommunications network. It would give GTE a powerful new competitive weapon against American Telephone & Telegraph Co. and smaller communications firms.
Wall Street analysts immediately praised the purchase as a smart move for both companies.
But Justice Department officials expressed concern that the acquisition could pose antitrust problems that could prompt the government to try to block the deal in court.
"There are serious questions about vertical integration between a local exchange company and an intercity carrier," said Ronald G. Carr, deputy assistant attorney general in the Antitrust Division. In this case, vertical integration is the ownership of both long-distance and local phone service by the same company.
Carr noted that AT&T's combined local and long-distance capability was a key factor in the Justice Department's successful suit to break up the Bell System.
"We obviously will study it very closely indeed," Carr said.
GTE's plan is opposed by MCI Communications Corp., Southern Pacific's chief discount long-distance competitor.
MCI Chairman William G. McGowan said "we're going to fight it in front of the Department of Justice and the Federal Communications Commission, to urge them not to accept it."
McGowan charged that the acquisition would give GTE an unfair advantage over MCI in marketing its long-distance service in the areas of the country that GTE serves.
Under the purchase agreement, GTE will buy both Southern Pacific Communications Co. and its long-distance microwave network serving about 425,000 customers, and Southern Pacific Satellite Co. (Spacenet), which plans to open a $200 million program in 1984 with the launch of two satellites. In August Prudential Insurance Co. of America announced an agreement in principle to invest up to $135 million in SP's satellite program, but an SP spokesman said today that the Prudential plan "may have to be renegotiated."
GTE's entrance into the long-distance business "will increase the level of competition" in the field, GTE Chairman Theodore F. Brophy said.
"There is an opportunity for a strong entrant to improve the quality of service and offer attractively priced service to the public," he said. "We believe the ownership of Sprint and Spacenet by a financially strong company will by any test be procompetitive."
Brophy argued that many corporate giants such as International Business Machines Corp. and International Telephone & Telegraph Co. also have entered the long-distance business so GTE should not be left out -- especially since GTE's telephone operations are smaller than each of the seven regional phone companies AT&T plans to spin off under its divestiture agreement with the Justice Department.
Not until last year did the intercity system marketed as Sprint become profitable. Revenues have been rising sharply ever since, and the company reported a 50 percent sales jump last year to $231 million. This year the company has had its most successful six months, with revenues of $161 million and operating profits of about $37 million.
SP Communications President Dale F. Pilz told the company's 2,300 employes that the deal will "enhance our ability to speed up our network expansion and, as well, strengthen our competitive position within the telecommunications industry."
Although the communications activities have drained the parent company of much-needed capital, they long have been regarded as Southern Pacific's "family jewels" because of the promise of a large return in the next decade.
Even so, financial analysts said that the sale of the communications operations is a wise move because the company needs substantial cash -- particuarly in light of the recent merger of its two biggest railroad competitors, Union Pacific and Missouri Pacific. "It's selling off the crown jewels, but the company needs the money -- and it's selling it off at a good price," commented Rolllins Maxwell, an analyst at E.F. Hutton.
Some financial specialists predicted that Southern Pacific will use the money to buy the Rio Grande railroad so it can become a single-line railroad between California and Kansas City.
The acquisition is one piece of an aggressive and continuing effort by GTE to move into competitive telecommunications fields. GTE already owns GTE Telenet, a data communications network, and also has embarked on an ambitious domestic and international equipment sales program.
Wall Street analysts have been enthusiastic about GTE, particularly since the January announcement of the Justice Department-AT&T divestiture agreement, which will split the Bell System's 22 local telephone companies from its equipment and long-distance arms. GTE is the only major telephone concern that has local phone service, encompassing more than 16 million telephones, and major equipment, satellite, and data communications operations.
"It's a good long-term strategy," said Ivan Wolff, an analyst with Donaldson, Lufkin & Jenrette Securities Corp. "They could be interconnecting into other carriers, but they made the choice that they want to own one."
Edward M. Greenberg, an analyst with Sanford C. Bernstein & Co., said the move was a sound one for GTE and predicted that it could add about 65 cents a share to GTE's annual earnings by 1986, a figure that would raise his projection for that year by almost 10 percent to $7.65 for the year.