NEWS OF THE WEEK Strange bedfellows? Reasons for PacTel/SBC union initially seem hazy >BY Shira McCarthy, Associate Editor-News

While the telecommunications industry waited for the long-expected nuptials of Bell Atlantic and Nynex, Pacific Telesis and SBC Communications pulled off a surprise elopement last week, leaving some experts wondering why these two seemingly polar telcos decided to tie the knot.

"At first I didn't see how it made any sense," said Boyd Peterson, telecommunications analyst at The Yankee Group, Boston.

Under terms of the $16.7 billion deal, PacTel will be absorbed into SBC Communications, with only the Pacific Bell and Nevada Bell names remaining intact. Phil Quigley, PacTel chairman, president and chief executive officer, will serve as vice chairman of the board and second in command to SBC Chairman and CEO Edward Whitacre.

PacTel and SBC don't seem to have much in common. Geographically, their regions are separated by U S West territory. SBC has pursued direct broadcast satellite and switched digital video cable TV services, while PacTel is deploying wireless cable and hybrid fiber/coax systems. SBC belongs to the Americast content alliance, while PacTel is part of Tele-TV.

SBC has made aggressive out-of-region plans, which include offering packages of local, long-distance and wireless services in Illinois, New York, Maryland and several other states. PacTel has generally limited itself to its own territory.

Peterson said, however, that given the company's poor financial condition, PacTel's decision to merge didn't surprise him-it's the choice of partner that threw him off.

"PacTel got hammered on revenues for intraLATA toll service because of competition [in California]," Peterson said. "It's really in poor condition, but it has the advantage of having California, which is the most popular state for telecommunications in the country. So it's been looking for a way to deal with the financial condition it's in."

The most obvious choice of partner for PacTel would be neighboring U S West, and a PacTel spokesman said the two telcos had discussed a number of alliance possibilities. However, U S West's acquisition of Continental Cablevision last month ended those discussions because the purchase gave it a route into California through Continental's properties there.

With U S West out of the picture, that left only five RHCs. Pummeled by competition in New York, Nynex is nearly as weak as PacTel and is likely to be the next RHC to disappear, said Allan Tumolillo, chief operating officer of Probe Research.

While Bell Atlantic Chairman and CEO Ray Smith might have "found some parts of California intriguing," it's likely that he decided to focus on Nynex and the Northeast corridor, Tumolillo said, and Ameritech and BellSouth have both tended to focus primarily on their own regions.

For SBC, the advantage is not only California's lucrative long-distance market, particularly the Los Angeles-San Francisco corridor, but also its high-volume telephone traffic with the Pacific Rim and Mexico. Half of all calls from the United States to Mexico originate in California or Texas, an SBC spokesman said.

SBC would gain significant control over traffic to and from Mexico and South America by acquiring the California market, in conjunction with its 10% stake in the Mexican telephone company TelMex.

A PacTel spokesman said it's unlikely that SBC Communications will pull another RHC into the fold, but other types of alliances could be possible. However, both PacTel and U S West said it's unlikely U S West will join forces with SBC Communications.

A U S West spokeswoman pointed out that the Continental acquisition includes properties in both Texas and California, leaving little incentive for an alliance in the near future.

SBC could find a new partner-such as LDDS WorldCom or Frontier-in the long-distance industry, Tumolillo said.

Industry experts agree that PacTel and SBC should make sure their marriage is going to succeed before they bring new partners into the fold. California and Texas are vastly different, and some wonder if the two companies will be able to overcome their differences enough to succeed.

But Bane doesn't agree. "These babies were separated at birth," he said. "Only 12 years ago, they were the same company, and I don't think they've had long enough to develop into completely different entities."