GTE Corp. announced yesterday that it will spin off its money-losing GTE Sprint long-distance telephone service into a joint venture with United Telecommunications Inc. in hopes of strengthening its competitive position with AT&T and MCI in the multibillion-dollar long-distance business.
The venture, which had been rumored for months, will merge Sprint -- the nation's third-largest long-distance service -- and United Telecommunications' similarly money-losing US Telecom -- the nation's fourth-largest -- into a new company, US Sprint Communications.
The Stamford, Conn.-based GTE said that it would take an after-tax $1.3 billion write-off mainly because of Sprint. United Telecommunications President William Esray said the company would take a $170 million write-off -- with a negative impact of $1.81 per share on its earnings -- plus pay GTE roughly $230 million as part of its contribution to the partnership. US Telecom's losses for the year ending Sept. 30 were estimated at $75 million.
The merger will require both Federal Communications Commission approval and special permission from the Justice Department for relief from a consent decree.
This venture continues the consolidation trend that has marked the long-distance telecommunications industry in the wake of the Bell System breakup in 1982. Last year, IBM traded its money-losing Satellite Business Systems long-distance subsidiary to MCI Communications Corp. for a 16 percent share in the telecommunications firm.
"There's only room for three major long-distance carriers -- AT&T, MCI/IBM/SBS and now GTE/United Telecom," said Robert E. LaBlanc, a telecommunications industry consultant. "There may be other niche carriers, but the broad market can only support three major players -- just as there are only three major automobile companies."
According to GTE and US Telecom officials, US Sprint will have approximately 2.2 million subscribers, or roughly 4 percent of the long-distance market. By contrast, American Telephone & Telegraph Co. has an estimated 85 percent market share, while second-place MCI reportedly has close to a 9 percent share.
"With US Telecom, we start off with a 4 percent share . . . and that puts us in a good position to challenge for the No. 2 position in the industry," said James L. Broadhead, president of GTE's Communications Services Group.
The new entity, which will be equally owned by GTE and United Telecommunications, also will include GTE Telenet -- the Virginia-based data communications firm -- and United Telecom Data Communications Co., formerly known as Uninet. Many analysts call data (computer-to-computer) communications the fastest-growing segment of the telecommunications marketplace.
US Sprint also will be able to use the expanding fiber-optic networks now under construction by both GTE and United Telecom. Fiber-optic cables are considered the backbone of future high-density, high-speed voice and data communications.
US Telecom has laid about 4,700 miles of fiber-optic cable in its network, while GTE Sprint has nearly 1,100 miles of fiber. The two companies say the partnership will have 14,200 miles of fiber in place by the end of this year, effectively covering more than 80 percent of the nation's population.
Spinning off Sprint will come as a major financial relief to GTE Corp., which purchased the company from Southern Pacific Communications Co. in 1983 for $750 million and the assumption of $250 million in debt. At the time, the purchase price was criticized as too high, but analysts generally hailed the move as giving GTE a major entry into a growing market.
GTE sank an estimated $1.5 billion to $2 billion into Sprint to build up the network's capacity, but delays, capacity constraints and federal rules that raised the price of access to local lines left Sprint consistently running in the red. Morgan Stanley analyst Edward M. Greenberg estimated that Sprint operating losses for 1985 approached $240 million. Before the venture, he forecast that 1986 Sprint losses would approach $275 million.
Privately, analysts criticize GTE management for building capacity in the wrong places and not moving as aggressively as MCI to take share away from industry giant AT&T.
"Strategically, the acquisition looked brilliant," said industry consultant LaBlanc, "but they were late in making important capital commitments, they didn't have facilities in place on time, and they had to put an embargo on taking orders from customers."
"Clearly, they hurt themselves," said Greenberg, "but they have made a dramatic recovery. Their customer count has jumped over 40 percent since last June."
Both Greenberg and LaBlanc describe the venture as "a tremendous move" for both companies. "It creates a third strong competitor in the market," said Greenberg. "It increases their chances for viability."
Executives from both companies declined to predict when the new company might turn a profit.
In a separate announcement, GTE said that it had signed a memorandum of understanding with German electronics giant Siemens AG to launch a joint venture to develop and market telecommunications-switching equipment globally.