Bell in $17bn tie-up with Pacific as merger mania hits

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The gates opened to a new wave of mega-mergers in the US telecommunications sector yesterday as SBC Communications and Pacific Telesis Group agreed to merge in a $16.7bn (pounds 11bn) deal, becoming the second-largest company in the sector behind AT & T.

The joining of the two regional Baby Bell phone companies is the most dramatic deal since Congress deregulated the industry on 8 February, and analysts believe it is a harbinger of similar gigantic combinations to come.

SBC said the merger would create the second-largest telecommunications company by market value in the US, and the merger is the first of its kind between two former Bell System companies. The merger gives the companies greater size and financial power to offer a broader range of services, something made possible by the law.

The two companies are among seven formed from the 1984 break-up of the old Bell System monopoly. Together, they serve the two largest states, California and Texas, and will have 30 miilion phone lines.

The merged company will take the SBC name and be led by SBC chairman and chief executive officer Edward E. Whitacre Jr. Pacific Telesis chairman and chief executive Phil Quigley will become vice-chairman.

The merged company will be roughly two-thirds owned by original SBC shareholders. The business will have more than 100,000 employees, revenues of over $21bn, operating cash flow of $9bn, and income of almost $3bn. The two former Bell System companies serve more than 30 million access lines.

Although local Bell phone companies were not previously banned from combining, long-distance companies were stopped from merging with local companies and vice versa. Cable companies were also banned from offering phone services. All these prohibitions were swept away last month, creating a new bout of "merger mania."

Mr Quigley said yesterday: "In this new competitive environment, customer satisfaction, a strong market presence, efficient and lower-cost operations, a substantial financial base quality and new, innovative services will be crucial to success in the marketplace."

Under the deal Pacific Telesis shareholders will receive 0.733 shares of SBC stock for each of their shares. Based on last week's stock prices, Pacific Telesis shareholders would receive SBC stock worth about $39 per share. When complete, SBC shareholders would own about 66 per cent of the combined company and 34 per cent would be held by Pacific Telesis investors.

The corporate headquarters for the combined company will be in San Antonio, Texas, where SBC has been based since 1993. The San Francisco area, home of Pacific Telesis, will be the headquarters for the company's long-distance operation, Internet services and international businesses.

Pacific Telesis is in the middle of cutting 10,000 jobs in its local phone operations by the end of next year. SBC is the only Baby Bell company that hasn't cut jobs. Mr Whitacre said: "This historic merger is about growthin jobs, markets and services to our customers."

After the merger, members of the PacTel board will be asked to join the SBC board.