MERGER MEANS END OF PACIFIC TELESIS : 2 BABY BELLS STRIKE $16.5 BILLION DEAL.

Byline: Russ Britt Daily News Staff Writer

Pacific Telesis Group will be swallowed by fellow Baby Bell SBC Communications in a $16.5 billion mega-merger, the first ever involving two former Bell companies, company officials said Monday.

Capitalizing on the recent passage of the 1996 Telecommunications Act, the two companies said they needed to join to be better positioned for coming changes in long distance and local service as well as video and data transfer.

Separately, each company was among the smaller Baby Bells created by the 1984 breakup of AT&T. But the combined firm will be one of the nation's largest corporations with 100,000 employees and sales of $21 billion annually.

Scheduled for completion this year, the merger also is not expected to result in any job cuts by San Francisco-based Pacific Telesis, which operates Pacific Bell - California's largest phone carrier.

Officials at San Antonio-based SBC, which is the parent of Southwestern Bell, said a net gain of 1,000 jobs in California is expected.

``The union of these two companies is not about layoffs. It is about the growth of the enterprise,'' said Edward Whitacre, SBC chairman and chief executive. ``It's about adding jobs.''

Many Pacific Telesis workers received voice mail messages from the company Monday morning announcing the deal. They were told their jobs would not be affected.

The 1,000 jobs will be created when the companies start offering long distance service, previously prohibited under the 1984 consent decree breaking up AT&T into its regional companies, and in the development of video transmission and growth of some administrative functions, Whitacre said.

Local phone bills are not expected to rise immediately, and the two carriers hope their merger will help them to better stay afloat as local service is opened up to competition.

Local customers will continue receiving bills from Pacific Bell, which will retain its name as an operating phone service carrier.

The corporate headquarters for the new company will be in San Antonio, but regional headquarters will be maintained in California and Nevada, where Pacific Bell and Nevada Bell operate.

California also will be the center of the company's long distance, Internet and international operations.

Whitacre is chairman of the new enterprise, which retains the name SBC Communications. Philip Quigley, Pacific Telesis chairman and chief executive, will take the title of vice chairman for the merged company.

The merger resulted from studies Pacific Telesis conducted over the past two years on possible partnerships. Pacific Telesis intensified its search for a strategic partner after the February passage of the landmark telecommunications bill, which opens up markets for long distance, local and cable services.

``Ed Whitacre and I have developed a relationship over the last couple of years and found we have a lot in common,'' said Quigley.

SBC provides local phone service in Missouri, Kansas, Arkansas, Oklahoma and Texas. Pacific Telesis serves California and Nevada. Combined, the companies serve 30 million phone lines and 80 million cellular customers.

``The initial read on it is it's great news for Pacific Telesis,'' said Dave Otto, analyst for Edward Jones & Co. in St. Louis. ``You get a stronger combined company than you had going into it.''

Pacific Telesis was the smallest of the Baby Bells to be created from AT&T's breakup, and its stock price had been down in recent months. The merger was hailed by Wall Street analysts who said SBC brings management expertise and efficiency to the deal while Pacific Telesis controls the lucrative California market.

Pacific Telesis stockholders will see their dividends cut nearly in half as a result of the merger - from 54.5 cents a share in the first quarter to 31.5 cents in the second quarter - but analysts said the company was doling out too much in dividends anyway. Otto said Pacific Telesis was saving only 10 percent of its profits to grow its business, which he said was too restrictive.

Wall Street responded positively to Pacific Telesis, sending the company's shares up 6 to close at 33-3/4 Monday. SBC shares dropped 2-3/4 to close at 49-7/8.

Pacific Telesis stock is likely to rise in coming days since the SBC offer amounts to $39 a share. Pacific Telesis investors will receive 0.733 of SBC stock for every share they currently hold.

Pacific Telesis also is considered to be farther along in development of Internet access, offering video services and development of its international operations. The two companies each own a stake in Telmex, the carrier for Mexico, and plan to grow that business.

A $16 billion plan to rewire California with fiber optic cable is temporarily on hold in the Los Angeles area as Pacific Telesis now is trying to develop wireless cable services. That plan will go ahead, in the hopes of reaching 70 percent of California households by 1997.

One sticking point may result from Pacific Telesis's Tele-TV venture, an entity created by the company and two other Baby Bells to develop entertainment programming for its wireless venture. SBC is a partner in a competing service.

``Something needs to change just because of the language in the joint venture contract,'' said Steven Hubbard, Pacific Telesis vice president of corporate development. But Quigley said the company is hoping there will be some cooperative arrangement reached with the other members of the two ventures.