US West, Global Crossing tie
Denver-based Baby Bell in $37B hook-up with network provider
NEW YORK (CNNfn) - Baby Bell U S West and telecom upstart Global Crossing announced Monday they will merge in a deal worth an estimated $37 billion. The deal forms a new telecommunications titan under the name Global Crossing Corp. and is yet another in a long line of mergers in the industry.
The new company will combine local and long-distance data services, offering local service to 25 million customers in the Midwest and West that U S West now serves. And it will have 2.8 million miles of fiber-optic phone lines linking 19 countries and 185 cities. The two companies had combined sales of $15 billion last year.
The companies said they expect to save $6 billion over 10 years. But the savings are not expected to come from cutting the combined work force of 60,000. A few overlapping executive positions will be eliminated, U S West spokesman David Beigie said, and these will be the only job cuts. Executive relocations to the new New York City headquarters will number "in the dozens," he said.
Global Crossing has rocketed since IPO
The merger is another example of the rapid consolidation in the telecommunications industry. Denver-based U S West (USW) is one of the last of the Baby Bell phone carriers to consolidate, while Hamilton, Bermuda-based Global Crossing (GBLX) has been on an aggressive push to wrap up deals since going public in August.
"We're having a merger of equals here," Solomon D. Trujillo, chairman, president and CEO of U S West told CNNfn.
Trujillo will be co-CEO of the new company along with Global Crossing chief Robert Annunziata. Annunziata, who was the founder of the local carrier Teleport, which competed head-to-head with regional Bells, is going full circle. U S West, a Baby Bell, was created by the breakup of AT&T (T).
"The world is changing," Annunziata said. "Now it's time for a global service provider."
Yet another in a string of mergers
The new company hopes to be a powerhouse that can go up against some of the biggest telecom companies in the industry. Mergers have swept through the telecom world, with SBC Communications launching a $61 billion bid for Ameritech, a deal the FCC is examining. Another Baby Bell, Bell Atlantic, is having better luck merging with GTE.
Wall Street didn't warm to this latest deal. U S West's shares took the biggest beating, losing 6.4 percent of their value Monday to close at 58-1/4, down 4. Global Crossing fared little better, losing 1.8 percent of their value, finishing at 60-1/4.
That's because the U S West-Global Crossing combination got a cold shoulder from some analysts. The idea that customers would choose Global Crossing over such heavyweights as AT&T Corp. or MCI Worldcom Inc. is doubtful, said Philip Wohl, a communications analyst with the S&P Equity Group.
"It almost looks like Global Crossing is trying to acquire companies that are still out there," Wohl said. "I don't see how this makes them into an instant competitor to the big guys. They may be taking on more than they can chew at this point."
The new company would have a market capitalization of more than $75 billion. The complex cash and stock transaction also involves another Global Crossing merger partner, long-distance carrier Frontier Corp. of Rochester, N.Y. It hopes to close on Frontier in the third quarter.
A complex deal to create two stocks
The new company will be 50 percent owned by U S West shareholders and 50 percent owned by Global and Frontier's shareholders.
U S West first will pay $2.4 billion cash, or $62.75 a share, for 39 million Global Crossing shares, the equivalent of a 9.5 percent stake. That transaction will begin within five business days and should close in a month.
It precedes an all-stock combination, estimated at $37 billion, if the Federal Communications Commission approves the deal. The companies hope to complete the merger by the second half of 2000.
The deal has a breakup fee of $850 million if either side pulls out. U S West played down rumors it has also been approached by Quest Communications Inc. "This is the only news we're announcing today," Beigie said.
Two classes of stock will be created, one linked to telecom services and the other to Internet-related assets. Shareholders will be able to choose how much of their holdings will be in each class. It's a "financial vehicle to accommodate the needs of the various types of investors," Trujillo said.
U S West better off in deal?
Global has been on an acquisition streak fueled by shares that have climbed five-fold since it went public last year. One well-known shareholder who has netted millions is former U.S. President George Bush, who received Global shares in lieu of an $80,000 fee for a speech he gave last year, according to the Wall Street Journal. Bush pocketed low-priced shares before Global Crossing's IPO.
Global Crossing was established to build and operate a private transatlantic telecom cable. Now it's trying to develop a domestic U.S. fiber-optic network.
But Wohl said Global Crossing's interest in U S West is a bit surprising because the American carrier, with its mostly rural network, is not a very attractive entity for a company trying to create a global link-up.
The deal is attractive for U S West, which has been the local carrier most-focused on the Internet, said Bob Wilkes, a telecommunications analyst with Brown Brothers. "I think it makes a lot of sense for U S West," he said. "It's a stock that's had a relatively low valuation."
To offer long-distance phone service outside its region, U S West would be required to get FCC approval. But it has not even begun the process, meaning many of the long-distance services the new company hopes to offer could be years away.
The companies' boards hammered out a deal over the weekend after Global Crossing's $11 billion acquisition of Frontier (FRO) threatened to derail the merger plan. Frontier's board approved the U S West deal Monday after Global Crossing sweetened the terms of the Frontier-Global Crossing merger.
-- by staff writers Martha Slud and Alex Frew McMillan