Tele.Com / June 10, 1998
By Larry Luxner
WASHINGTON -- Baby Bells are gobbling each other up throughout the United States, in a dizzying trend that may have lasting effects on telecom developments as far away as Europe, Latin America and the Far East.
Last month, San Antonio-based SBC Communications Inc. surprised the telecom world by announcing it plans to acquire Chicago-based Ameritech Corp. for $56.18 billion in stock. If approved by federal regulators, the deal would make SBC the largest local-service provider in the United States, with $41 billion in revenues and about a third of the nation's 178 million telephone lines.
While the controversial merger will no doubt affect residential and business customers from Texas to Michigan, it's not just Americans who'll feel the aftershocks. With its added clout, SBC would gain entry into Europe's newly deregulated telecom market -- which analysts currently value at around $160 billion.
"The growth in Europe and the global market is in part what's spurring the merger," said SBC spokesman Selim Bingol. "In 1996, the market for all telecommunications services worldwide was $700 billion, and it's growing at an estimated 20% a year. That growth is split roughly among North America, Europe and Asia, each with one-third. You can make the case that companies which want to be successful global operators will have to take the steps we took."
Ameritech, based in Chicago, has invested heavily overseas -- in China, Poland, Norway, Belgium, Hungary, Denmark and New Zealand -- though curiously not in Latin America. SBC, on the other hand, has a strong presence south of the Rio Grande. It already owns just under 10% of Teléfonos de Mexico (Telmex), as well as 49% of Chilean long-distance operator VTR.
Since its acquisition in 1990, SBC says it's invested over $1 billion in Telmex, helping to boost Telmex's access lines by over 60% to 8.5 million, and bringing phone service to more than 10,000 urban and rural areas for the first time. SBC also owns a 49% share of Chile's VTR, a conglomerate with interests in cellular telephony, cable TV, long-distance and local phone service.
That's not all. In Switzerland, SBC is part-owner of a new startup concern aimed at stealing business away from Swiss Telecom. The company also has a stake in Telcom South Africa, as well as other ventures in France, Taiwan and Israel.
All told, the combined SBC-Ameritech will have operations in 19 foreign countries.
"Clearly there are opportunities, and we want to be in a position to take advantage of them," said Bingol. "In our view, we're headed toward a time when there'll be a handful of large telcom companies capable of competing on a worldwide basis. We want to be one of them."
Bingol discounted a report in The Wall Street Journal suggesting that European Union officials would have to approve the merger. According to the newspaper, "the combined size of the two companies would be over the EU's threshold that requires its executive body to investigate."
Next to Europe, Latin America is probably the world's hottest market for telecom acquisitions. According to a study by Pyramid Research Inc., South America's phone companies will add 17 million conventional phone lines and 16 million cellular and PCS lines between now and 2000 -- translating into investments of nearly $40 billion over the next four years. The study says growth will be led by Brazil, whose Ministry of Communications has called for the addition of 10 million lines by 2000.
"Private investment will fuel rapid adoption of leading-edge technologies across the region," says Pyramid analyst Catherine Forster Connolly. "Many of these countries will go abroad to seek foreign investment and create attractive joint-venture opportunities for global players to extend their reach into the region."
Bell Atlantic, which last year gobbled up Nynex in a $25.5 billion deal, has operations in 21 foreign countries, including cellular interests in Mexico (Iusacell); wireline partnerships in the United Kingdom, and wireless ventures in Italy, Czech Republic, Slovakia, Poland, Greece, Thailand, Indonesia, Philippines and New Zealand.
"We feel pretty strongly that the mergers allow businesses to become much more competitive from a global perspective," says John Killian, group president-international at Bell Atlantic. "It give us the flexibility to do things in ways we may not have in the past."
Killian, who puts the market value of Bell Atlantic-Nynex's combined overseas investments at over $8 billion, says "many of the countries I visit are well aware of the geography we occupy in the United States, and see it is one of the most attractive [territories] in the world."
Observes Michael Krier, an analyst at The Strategis Group in Washington: "A lot of people are saying the Baby Bells will increase their profit margins, so they'll have more money to invest in other areas. Whether they choose to do it internationally or focus on the United States, it's hard to say."
Of the remaining Baby Bells, Denver-based U S West is the smallest -- with only 16 million access lines in a sparsely populated territory stretching from Seattle to Des Moines. It's also the only Baby Bell without any traditional international presence. U S West's only foreign holding -- a venture with Indian cellular operator BPL -- has been transferred to its cable-TV sibling, MediaOne. Says company spokesman David Biggie: "Right now, our focus is on serving customers in our 14-state territory."
When it comes to investing overseas, neither SBC nor Bell Atlantic are the most aggressive of the Baby Bells. That title belongs to Atlanta-based BellSouth -- by far the major investor in Latin America, and the only Baby Bell not taking over or being acquired by someone else.
In fact, throughout South America, BellSouth is becoming as well-known to local investors as McDonald's and Blockbuster Video. The $19 billion giant currently has operations in nine Latin countries: Argentina, Brazil, Chile, Ecuador, Nicaragua, Panama, Peru, Uruguay and Venezuela.
In May, BellSouth's Peruvian subsidiary, Tele2000, won the B-band concession to offer service outside the Lima area. As such, it'll spend over $200 million to extend analog and TDMA-based coverage into the Peruvian interior. BellSouth paid $35 million for the license, which will enable it to compete head-on against Telefónica del Perú S.A.
Charles Miller, president of BellSouth International, says the new concession "also positions BellSouth to be a nationwide, full-service competitor in Peru after next year's deregulation." Since entering Peru over a year ago, BellSouth has invested more than $250 million, which includes the money it spent to acquire a 59% stake in Tele2000. At last count, the network had around 100,000 subscribers.
More impressively, a consortium led by BellSouth last year paid a whopping $2.6 billion for a cellular license covering the São Paulo, Brazil, metropolitan area. A few months later, it paid $512 million for a second license covering a six-state area of northeastern Brazil.
But perhaps the biggest investment opportunity in Latin America is now unfolding.
On May 22, the Brazilian government approved a plan to divide state-owned Telebras, based in Brasília, into three wireline local-exchange companies, eight wireless companies and one long-distance carrier -- a precursor to the expected privatization of Telebras, which analysts value at between $50 billion and $60 billion.
The investment frenzy isn't limited to Baby Bells. GTE Corp., which has $23.3 billion in annual revenue and 27.7 million phone lines across the United States, owns 100% of Codetel in the Dominican Republic; it also leads a consortium that owns 40% of CANTV, the telephone monopoly of Venezuela.
On May 27 -- in the biggest phone privatization in U.S. history -- GTE agreed to pay $375 million for 50% plus one share of Puerto Rico Telephone Company (PRTC); the complex transaction, which also involves Banco Popular and local Puerto Rican investors, will generate a total of $1.875 billion for the Puerto Rican government.
With 1.3 million lines, over 155,000 cellular subscribers and over 237,000 paging customers, PRTC is the 12th largest phone company in the United States. In 1997, net income was $242.2 million on operating revenues of $1.2 billion.
Immediately after the sale, GTE will own 45%, Banco Popular 5%, PRTC employees 3% (through an employee stock ownership plan), and the Government Development Bank 47%. The government has granted GTE a three-year option to acquire an additional 15% of PRTC. A recent FCC order requires PRTC to place its cellular and paging operations in a special subsidiary from the rest of its operations. In order to comply with this directive, PRTC will reorganize its operations into two separate wholly owned operating units.
"Puerto Rico is a nice middle ground between our operations in the Dominican Republic and Venezuela, and our domestic U.S. operations, in that it has characteristics of both," said GTE spokesman James Savage. "It's a nice mix of areas, and we feel we have certain advantages we could bring to the table."