GTE, Bell prepare data spin-off for merger

New York-based local carrier Bell Atlantic told analysts today it would ask regulators as soon as Wednesday to let it spin off GTE's high-profile BBN data and networking services division. Bell Atlantic does not yet have approval to offer long-distance data service in many places in the country, making it impossible for the combined company to offer services over the GTE data network.

Analysts said the news marks a warming in the talks between Bell Atlantic and Federal Communications Commission officials, who have rejected several previous ideas for how to handle the sticky issue of GTE's data business.

"I assume that the reason they're going this far is that they've been encouraged by FCC staff response," said Prudential Securities analyst Susan Lynner. "(The data business) has presented a particular problem. Perhaps they've found a way to cut that particular Gordian knot."

The news comes as the FCC faces growing pressure from Congress to streamline its merger-review process. Some analysts say progress on the Bell Atlantic merger may even hold good signs for Sprint and MCI WorldCom's planned marriage, which will likely prove even more controversial than the local companies' deal.

Bell Atlantic and GTE announced their plans to merge in early 1998, but have been stymied by regulatory concerns since. Together they would own about a third of the local phone lines in the United States, as well as being a powerhouse in the data and mobile phone businesses.

The biggest sticking point in the deal has been GTE's Internetworking division, on its own one of the largest long-haul data and networking concerns in the country. Although Bell Atlantic got approval to offer long distance in New York, it still can't offer the service in other parts of the country.

But the two companies can't afford to shed the data business altogether. The division on its own is well-regarded in the networking community, and both companies have seen data business grow sharply as a proportion of their overall revenues. Bell Atlantic said today that its own data revenues grew more than 26 percent last quarter.

They've tried several ideas aimed at breaking the ice in FCC circles, from suggesting that the GTE Internetworking assets be placed in trust until Bell Atlantic loses its regulatory constraints, to proposing a tracking stock for that part of the company. But the FCC never bit.

Early this month, the companies tried a new tack, suggesting that they spin off the data arm into a separate $2.5 billion company. The new firm would be 90 percent publicly owned--but Bell Atlantic would have the option to repurchase most of that after five years, if it won the regulatory approval it needs.

Publicly, Bell Atlantic is simply saying that it is close to finishing its proposal, and isn't commenting on the timing or on the FCC's response to their early proposal.

"We have been in exploratory discussions with the FCC for several months," said Bell Atlantic spokeswoman Susan Butta. "As soon as we have a viable proposal, we will make a formal filing as soon as possible."

But analysts note that the company wouldn't be filing its official proposal so soon if it hadn't begun receiving encouraging signs from the FCC.

Regulators' willingness to work with Bell Atlantic and GTE could also mark a good sign for MCI WorldCom and Sprint, which have proposed their own massive merger. The FCC may see Bell Atlantic as a way of keeping those companies' combined market power in check, some analysts said.

"If the FCC were to reject the Sprint merger, then it wouldn't be nearly so concerned with keeping BBN intact," Banc of America Securities analyst Rex Mitchell noted.

But the FCC has also been under pressure from Congress to speed up its merger approval process. The Bell Atlantic process is nearing the two-year point, a black mark that officials would like to erase before legislators decide to change the merger rules, analysts said.

"This is probably in part a response to congressional feelings that the merger-approval process is taking too long and is too open-ended," Lynner said. "It's better if they show they can deal with these under the existing (laws) than having to deal with some legislatively mandated time frame."

Once the companies file their formal proposal for the merger and the data spin-off, the FCC will send the idea out to the public for comment.

Analysts said any final approval would likely take at least three to six months from that point.