News and Commentary: Bell Atlantic Aims to Go Long

Bell Atlantic Aims to Go Long

By Richard McCaffery (TMF Gibson)
September 29, 1999

Regional telecommunications carrier Bell Atlantic (NYSE: BEL) has filed its long-awaited application with the Federal Communications Commission (FCC) to enter the long distance calling market in New York.

If approved, Bell Atlantic will become the first Regional Bell Operating Company (RBOC) to offer long distance services in its own calling area since the Telecommunications Act of 1996 made it possible. In New York, it would allow Bell to satisfy all of its customers' domestic and international telecommunications services -- one company, one bill.

A bit of background on the Telecom Act: The idea was to allow any company to enter any communications business, hence full and open competition. It was the first major change to U.S. telecommunications law in nearly 62 years and sought to tear down the barriers separating cable, wireless, local, and long distance services.

But for Bell to take advantage of the deregulation, it first had to spend more than $1 billion to make sure its local telephone network was open to competitors wanting to offer local calling services in Bell's territory. This was part of the new law. For Bell and other RBOCs to go long, competitors have to be able to go local.

For consumers, the promise of a fulfilled Telecom Act should mean more choices and lower prices. For investors, it should mean that telecom providers have an opportunity to tap into new markets. And not just new markets. It should give companies a chance to aim new services at their most profitable customers. This is an area many analysts think is ripe for growth.

Let's face it, long distance phone service is nothing new, and monster companies like AT&T (NYSE: T) and MCI WorldCom (Nasdaq: WCOM) have a clear lead over a newcomer like Bell Atlantic. But if Bell could turn to its more than 8 million customers in New York and offer creative packages for local, long distance, data, and even Internet access services, that could drive sales. Think of the leverage State Farm has when it offers clients a sweet discount on home owner's insurance because they already have a State Farm auto insurance policy. Bell would benefit from having the same leverage.

The New York company, which has been working to enter the long distance market for more than two years, says it's a critical part of its plan to bundle services for customers. No company has made a go of bundling yet, but AT&T and others are trying. Those that can't will get left behind. The picture of a converged communications world and bundled service offerings makes too much sense to fail, though it will probably take longer than anyone expects. (The timing doesn't matter much to long-term investors.)

If Bell succeeds in New York, it plans to file applications to serve Pennsylvania, Massachusetts, New Jersey, Virginia, Maryland, and eventually all 14 of its territories stretching from Maine to Virginia.

Investors have good reason to think the company can do it. It has delivered solid results to shareholders since springing forth from AT&T in 1983, averaging a 19.5% annual return (assuming dividends were reinvested) compared to a 17.9% average return for the S&P 500.

Going forward, Bell expects earnings per share growth of 13% to 15% for the first two years after its proposed merger with GTE (NYSE: GTE) is completed, and in excess of 15% after the first two years (minus merger-related charges). The company has consistently generated more cash from operating activities than investing, steadily increased its dividend, and has nearly $1 billion in cash.

Sure, it's hard to pick the winners in this arena, but Fools have to applaud deregulation that opens the ring for a competitive fight. After the GTE merger, Bell will become the second largest U.S. phone company, giving up a few pounds to AT&T. Take the robes off. Let's see if Bell's ready to scrap with the long distance crowd.

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