GTE Corp. and Contel Corp., giants of the independent telephone business, yesterday announced tentative plans for a $6.2 billion merger that would create a telephone company rivaling in size the largest of the seven Baby Bells.
Contel's board of directors met yesterday in New York and gave preliminary approval to the surprise offer from GTE. If approved by shareholders and regulators, the merger would bring a big-time merger to an industry that has been remarkably stable since the 1984 breakup of the Bell System.
The merger calls for GTE to acquire Contel by issuing 1.27 shares of its common stock for each share of Contel common stock. It would be a tax-free exchange of shares for Contel shareholders. News of the merger plan sent Contel share prices soaring $7.12 1/2 to $35.12 1/2. GTE, however, lost $1.25 in value to close at $29.75 as investors worried that the takeover would depress its earnings.
The deal could bring changes in Washington area employment. The two companies employ about 5,250 workers in the area, many of them in duplicative satellite communications companies and federal contracting. Contel provides local phone service in Prince William County. (See article, Page D4.)
The companies said the deal would allow a pooling of resources for research and development, achieve economies of scale and help the companies push into new areas, such as cable television. The companies also would move forward in one of the most predictably profitable businesses in America, local telephone service.The seven Baby Bells, including Bell Atlantic Corp. and Nynex Corp, operate about 80 percent of the nation's local telephone lines. The rest are provided by hundreds of independents. GTE, based in Stamford, Conn., is by far the largest. With annual revenue of $17.4 billion, GTE ranks in the Baby Bells's class -- even without the proposed merger. Contel, with annual sales of $2.1 billion, is third among the independents.
Both companies focus on local phone companies in the nation's rural areas or in small and medium-size cities. Contel and GTE also have subsidiaries in satellite communications, cellular telephones and government contracting and are experimenting with cable TV. Both have undergone major restructurings in recent years.
While each Baby Bell operates in a specific area of the nation, GTE and Contel own telephone systems coast-to-coast, a patchwork that helps fill in the gaps between major metropolitan areas. GTE has some significant urban operations, including service for all of Honolulu and parts of Los Angeles, Dallas and Tampa.
Together, the two companies would provide 17.7 million telephone lines nationwide, as well as be a major power in cellular telephones.
Todd Parrish, an analyst at the securities firm Blunt Ellis & Loew, suggested that Contel's cellular properties were of special interest to GTE. Theodore J. Moreau of the Robert W. Baird & Co. securities company saw cellular as important, too. He suggested Contel was willing to be acquired because it was lacking capital to expand in this field, which is growing at 20 percent to 30 percent a year.
This is Contel's second attempt at a merger. In 1986, it reached a deal to merge with Communications Satellite Corp. (Comsat) of Washington. Then, in a rancorous reversal of course, it backed off after a federal ruling that Comsat had overcharged customers by tens of millions of dollars and would have to pay them back.
Small telephone companies are bought and sold from time to time, but in general, the industry remains a stable, quiet place in terms of ownership, untouched by the merger mania that struck so many other U.S. companies in the 1980s.
The Baby Bells have with only a few minor exceptions refrained from buying, preferring instead to focus on diversifying out of the telephone business. Takeover specialists have stayed away from the Bells, in part, suggests Martin McCue, general counsel of the U.S. Telephone Association, because regulators might block deals out of fear that public services would be threatened.
Some analysts suggested yesterday's deal could touch off a wave of consolidations among independents, though others dismissed that, saying little was for sale. Moreau suggested, however, that a Baby Bell might make a counteroffer to buy Contel.
To date, however, the Baby Bells have been more interested in entering businesses that are banned to them by law: manufacturing, long distance and "information services," the providing of computer data over telephone lines. They are lobbying heavily to get the restrictions removed.
GTE and Contel, in contrast, have many of these freedoms but in many cases have been ambivalent about exercising them. GTE is withdrawing from manufacturing of telephone switching equipment and has reduced its holdings in long-distance company US Sprint Communications Co. To date, it has fielded only minor offerings in information services.
GTE has chosen instead to focus on the business it knows best, local telephone service, which is a virtual monopoly in its service areas and provides a near-certain financial return year after year. The merger with Contel would give it 2.6 million new lines in the snap of a finger.
Cable TV is one new business which both companies have shown strong interest in entering. GTE is operating as an experiment a combined TV and cable system using fiber optics in Cerritos, Calif. Contel also is researching cable technology at its Virginia facility.
Both companies are trying to develop new technology. "We could see the end of our double-digit growth in revenue and that we had to become more than just a phone company," Contel President Don Weber said in a recent interview. The company spent $12 million opening a technology research center in Chantilly.