2 Baby Bells To Merge Cellular Units

July 01, 1994|By Michael Dresser | Michael Dresser,Sun Staff Writer

The race to create a nationwide network for wireless communications accelerated yesterday as Bell Atlantic Corp. and its Northeastern counterpart, Nynex Corp., announced plans to merge their cellular businesses into a super-regional giant with a ravenous appetite for new acquisitions.

The cellular network the companies propose will sprawl down the Eastern Seaboard from Maine to South Carolina, with a portion of New Mexico and Arizona.

It's a huge territory, but nowhere near as big as the ambitions of the deal's architects.

"We will, this company, build the wireless lane of the information superhighway," Raymond W. Smith, chairman and chief executive of Bell Atlantic Corp., said at a news conference in New York. He added that the two partners are already talking with potential partners in an effort to forge a national alliance for "personal communications services."

Michael Balhoff, telecommunications analyst for Legg Mason in Baltimore, called the deal "a lightning rod to attract the energy" of other cellular phone companies as partners. "Bell Atlantic and Nynex have produced a core that will attract other Bell companies and probably Sprint to put together a national presence," he said.

For consumers, the first major alliance of two Baby Bells will likely bring small price reductions in the short term as the two companies cut duplicated costs. Over time, analysts said, the deal could help spark a competitive free-for-all that could make cellular phones so inexpensive that virtually everyone will have one.

"You're going to give your kids a phone. What a great thing for a parent to have. You can attach them around their necks," said Craig Ellis, senior telecommunications analyst at Wheat First Butcher Singer in Richmond, Va.

In his news conference yesterday, Mr. Smith made it clear he shares that optimism about the cellular market, which has been growing at a 50-percent-a-year clip. He predicted that cellular phones would increase their market penetration from 6 percent to 35 percent over the next 10 years.

Philadelphia-based Bell Atlantic, the regional phone company whose wired-line territory includes Maryland, will be the dominant partner in a combined company -- initially controlling a 62.35 percent interest, with New York-based Nynex holding the rest. Larry Babbio, Bell Atlantic's chief operating officer, will head the management committee of the new venture, which has not yet been named.

For now, the merger does not affect the companies' conventional telephone businesses -- but that might not be the case if Congress passes a telecommunications reform bill this year.

"Is this a precursor to what we're going to see in a new competitive telecommunications world?" Mr. Ellis said. "Certainly, yes."

While Bell Atlantic's last blockbuster announcement -- its proposed merger with Tele-Communications Inc. -- fell apart in January, Mr. Smith stressed that unlike the TCI deal, this one is based on a definitive agreement, not a letter of intent.

The combination will require regulatory approval from the Justice Department and the Federal Communications Commission, but Mr. Smith said there are no rules forbidding such a merger.

Bell Atlantic and Nynex said their strategy will include aggressive bidding for licenses when the FCC auctions off additional spectrum for personal communications services later this year.

The merger is as much a matter of survival as ambition. By joining forces, the two companies put themselves in a stronger position to wrestle with other giants in a business that is becoming dangerous for small fry. Already two ventures are moving in the direction of a national wireless network -- the existing alliance of MCI Communications Corp. and Nextel Communications Inc. and the proposed combination of AT&T Corp. and McCaw Cellular Communications Inc., which is awaiting regulatory approval.

The new company will apparently become the third or fourth largest cellular communications provider in the United States, after Southwestern Bell Corp., McCaw and possibly GTE Corp. Together, Bell Atlantic and Nynex serve a region with a population of 55 million that includes seven of the nation's top 20 markets, including New York, Boston, and Baltimore-Washington. Executives of the companies valued the combined cellular company, with 1.8 million subscribers, at $13 billion.

In the Baltimore-Washington market, the new company's chief competitor will be Cellular One Washington-Baltimore, a subsidiary of Southwestern Bell. Charles Hoffman, president of Cellular One, professed to be unconcerned by the alliance and said he doubts Southwestern would seek a similar partnership. "We're already twice as good. I don't know who we'd ally with," Mr. Hoffman said.

But Mr. Balhoff said such protestations should be taken with a grain of salt.

"I believe some sort of national allure is going to be necessary to be a player in this industry," he said.

Both companies' stock posted modest gains yesterday. Nynex shares closed up $1 a share, at $37.875, and Bell Atlantic gained 62.5 cents, to $56.

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