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Global Crossing, US West agree to deal

The companies announce plans to merge their two businesses, in a complicated two-part deal that would eventually create a new firm worth close to $75 billion.

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Local phone company US West and undersea fiber-optic firm Global Crossing today announced plans to merge their two businesses, in a complicated two-part deal that would eventually create a new company worth close to $75 billion.

As reported earlier, US West will first buy about 9.5 percent of Global Crossing, followed by a more complete merger of the two companies' businesses after the deal gains regulatory approval.

"We are bringing our companies together immediately to show our alliance and show our intention to make this work," Global Crossing CEO Robert Annunziata told reporters this morning.

The new company, which will be called Global Crossing, will be 50-percent owned by current Global Crossing stockholders and 50-percent owned by US West stockholders, the companies said.

The two companies, however, plan to keep their businesses separate on Wall Street. After the merger, the joint company will be split into two tracking stocks, one to follow the stable, slow-growth local line business, and one to track the more risky data, Internet, wireless, and long distance business.

Also folded into the deal will be Frontier, a long distance company that Global Crossing agreed to buy for close to $11.2 billion in March. Today's deal is contingent upon that earlier merger going through, although US West's initial investment will be made immediately.

Annunziata and US West CEO Sol Trujillo will become co-CEOs of the new company.

US West, Global Crossing, and Frontier together will have a market capitalization of close to $75 billion, and combined revenues of more than $15 billion.

New players shake things up
The deal marks the first full merger of one of the original local phone monopolies with one of the new breed of aggressive, fast-growing long distance players. Global Crossing was created just two years ago with a focused undersea fiber optic cable infrastructure, but has already grown to reach a market value of more than $26 billion.

The company's acquisition of Frontier in March solidified its ambitions to become more than a wholesaler of international voice and data traffic. Today's deal cements its goal to join the top tier of international telecommunications players.

US West is the smallest of the remaining independent Baby Bell phone companies, which were carved out of AT&T in 1984. Serving a highly rural 14-state market across the Western United States, it has not reached the same levels of growth marked by its bigger peers Bell Atlantic and SBC Communications. But it has invested more quickly in rollouts of advanced services such as high-speed DSL Internet access and Net-enabled wireless phone service.

"We're talking about going from local to national to global in our reach," Trujillo said.

But today's deal marks just the latest twist on growing consolidation across the telecommunications landscape.

US West's local phone peers also are positioning themselves for the day when they are given the green light to enter long distance markets.

BellSouth took a small stake in Qwest last month, following SBC Communications' similar investment in Williams Communications, another new fiber-optic long distance firm. Both plan to use their partners' networks for long distance service as soon as they are given regulatory approval to enter that market.

The largest local phone companies are also pursuing an aggressive horizontal expansion strategy, however. Bell Atlantic, which has already merged with Nynex, is in the process of merging with GTE, the largest local phone company not created out of the 1984 AT&T division. Meanwhile, SBC--fresh from its purchase of California's Pacific Telesis--is trying to merge with Ameritech.

Hurdles and a new cash cow
Today's merger was apparently sparked by Trujillo, who said he called one of Global Crossings' founders, Gary Winnick, several weeks ago to discuss the two companies' joint visions. That conversation led to the merger, he said today.

"I wanted to find a company that would help us [expand] in a next-generation way, in a data-centric, IP-centric way," Trujillo told reporters. "I called Gary [Winnick] up, and we had similar view of the way life should be going forward. That led into the conversations about merging the two companies."

The marriage still has some regulatory hurdles to jump, however. Federal law bars any of the Baby Bell companies from entering the long distance market in their home territories until they have completely opened their former local monopolies to competing services.

US West has not yet won federal approval for these markets, so the new Global Crossing will have to divest or shut down Frontier's long distance businesses in US West's 14-state service area. Frontier does just $18 million in business in those states, Annunziata said, out of a total revenue stream of about $1.9 billion.

"We will work very aggressively with regulators," Annunziata said. "But we will abide by the law for now. ? If we do not get approval [for long distance] by the time the deal closes, we will make other arrangements for those customers."

Analysts agreed that the companies would have rework some strategy to satisfy regulators, but could probably make the deal work. "I think there are ways to finesse the regulatory issues," said Yankee Group telecommunications analyst Boyd Peterson on Friday, after rumors of the deal emerged.

Once the two companies do join hands, they will be able to cross-subsidize each other's efforts. Trujillo pointed specifically to US West's work on advanced services such as high-speed DSL Internet access, and TV service over DSL lines, and said the merger would help speed the development and deployment of these products.

Meanwhile, US West's stable revenue and easy access to capital will help the combined company expand further.

"Along the way, if we see something that makes sense, I wouldn't rule out another acquisition," Annunziata said.

US West's first purchase of Global Crossing stock will begin this week, the executives said, and will be completed by next month.

The deal is expected to close by mid-2000, the companies said. Global Crossing's acquisition of Frontier has already been granted initial antitrust clearance, and is expected to close by the third quarter of this year.

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