) Motion to Remove Merger Conditions Relating To

Before the FEDERAL COMMUNICATIONS COMMISSION Washington, D.C. 20554

In re Application of ) ) GTE CORPORATION, ) Transferor, ) CC Docket No. 98-184 ) and ) ) BELL ATLANTIC CORPORATION, ) Transferee ) ) For Consent to Transfer Control ofDomestic ) and International Sections 214 and 310 ) Authorizations and Application to Transfer ) Control ofa Submarine Cable Landing License )

MOTION TO REMOVE MERGER CONDITIONS RELATING TO VERIZON'S RELATIONSHIP TO GENUITY, INC.

Verizon moves the Commission to remove certain conditions imposed upon the merger of GTE and Bell Atlantic relating to Verizon's relationship to Genuity, Inc.

("Genuity,,).l Because Verizon has relinquished its right, under specified circumstances, to convert its equity into a controlling interest in Genuity, the predicate for these conditions no longer exists.

The Commission recently granted this type ofreliefunder similar circumstances in the AT&T-TCI merger proceedings. The same result should obtain here. Verizon's relinquishment ofits right to convert its equity into a controlling interest in Genuity has

Application ofGTE Corporation, Transferor, and Bell Atlantic Corporation, Transferee, For Consent to Transfer Control, 15 FCC Red 14032 (2000) (hereinafter "Merger Order") and Appendix B thereto. eliminated the basis for these conditions and they should be removed as ofthe date

Verizon relinquished its conversion right.

I. The Genuity Conditions Were Imposed Because Verizon Retained The Right To Acquire A Controlling Ownership Interest In Genuity Following The Merger.

The Merger Order required GTE to transfer substantially all ofGenuity's

nationwide data business to a separate public corporation prior to the merger. As a result,

after the merger, Verizon held a less than 10% equity interest in Genuity through its

ownership ofnew Class B common stock. Merger Order, Appendix B at ~ 2. Verizon

retained, however, a conditional right to acquire a controlling interest in Genuity. The

Merger Order granted Verizon a right to convert its Class B stock into an interest ofup to

82% ofGenuity stock ifcertain threshold requirements were met. 2

Because Verizon retained the right to acquire control under specified

circumstances, the Commission imposed several post-merger conditions in Appendix B

(the "Genuity Conditions") to ensure that Genuity operated independently. The

conditions were intended to ensure that Verizon's conditional right did not result in either

de jure or de facto control ofGenuity and that Verizon did not discriminate in favor ofa

business that it might later reintegrate.

The Merger Order explicitly tied the Genuity Conditions to the existence of

Verizon's conditional interest. The Commission opened section V.B. ofthe Merger

Order with a discussion ofsection 271. Merger Order at ~ 39. The Commission then

2 This conversion right arose after Verizon eliminated applicable section 271 restrictions representing 50% ofBell Atlantic's total in-region access lines within five years ofthe merger's close. Then, assuming the 50% threshold is met, Verizon could exercise its conversion rights only ifit had eliminated section 271 restrictions as to at least 95% oftotal Bell Atlantic lines. Merger Order, Appendix B at ~~ 4-15.

2 engaged in an extensive analysis ofthe term "affiliate" and the nature ofVerizon's

conditional right to acquire Genuity, and concluded that because Verizon's conditional rights were "contingent," they did not render Genuity an "affiliate" ofVerizon. Id. at ~~

41-65. The Commission focused on the terms ofthe Genuity Conditions, which include limits on Verizon's involvement in corporate governance, the restrictions on Verizon funds flowing to Genuity, the requirement ofarms-length dealings, and annual audits.

The Commission found that any discrimination by Verizon in favor ofGenuity would be

"readily detectable" by, among other things, the conditions requiring annual audits and special access reporting. Merger Order at ~~ 70-74. The Commission also concluded that by virtue ofthe Genuity Conditions "Bell Atlantic/GTE will not exercise de jure or de facto control ofGenuity prior to the potential conversion ofits Class B shares."

Merger Order at,-r 76.

II. The Genuity Conditions Should Be Removed Because Verizon No Longer Has The Right To Convert Its Equity Into A Controlling Interest in Genuity.

The Genuity Conditions are entirely unnecessary because Verizon no longer has the right to convert its equity into a controlling interest in Genuity. On July 24, 2002,

Verizon exercised its right to convert all but one ofits Class B shares into shares ofClass

A capital stock giving Verizon an equity interest in Genuity ofapproximately 9.99%.

Declaration of Stephen E. Bozzo at,-r 3. By doing so Verizon no longer had a right to acquire a controlling interest in Genuity by conversion ofClass B shares. Id. The director on the Genuity Board ofDirectors who represented Verizon also resigned shortly thereafter. Id. at,-r 4. Moreover, on November 27,2002, Level 3 Communications, Inc. and Genuity announced an agreement under which Level 3 will acquire certain of

Genuity's assets subject to regulatory and Bankruptcy Court approvals. Id. at,-r 5 and

3 Exhibit A thereto (Press Release ofVerizon Communications Inc. dated November 27,

2002). Level 3 Communications will become a supplier ofinterLATA services to

Verizon. Verizon does not hold an equity interest in Level 3 Communications. Id.

Just recently, the Commission removed a merger condition under analogous

circumstances.3 In 1999, at the time ofthe AT&T-TCI merger, AT&T provided mobile

service through AT&T Wireless Services and TCI held an equitable interest in Sprint, which provided competing wireless service through a subsidiary. AT&T-TCI Order at ~

2. As a condition for approving the merger, the Commission required AT&T and TCI to divest their equity in Sprint. Id.; Merger Order at ~~ 98-112. According to the

Commission, it did so to ensure compliance with the CMRS spectrum cap. Id. In 2002,

AT&T spun offboth AT&T Wireless and the former TCI subsidiary that had held equity in Sprint. As a result, there was no longer a possibility that the merged entity's interest in

Sprint's wireless business would violate the spectrurl1 cap. The Commission removed the merger condition, concluding that "[i]n light ofthese changed circumstances there is no longer any regulatory reason to maintain the divestiture condition." AT&T-TCI Order at

~3.

The same rationale supports removing the Genuity Conditions. The conditions were initially imposed because Verizon could, under specified circumstances, convert its equity into a controlling ownership position in Genuity. That right has now been

3 In the Matter ofApplicationsfor Consent to the Transfer ofControl ofLicenses and Section 214 Authorizationsfrom Tele-Communications, Inc., Transferor, to AT&T Corp., Transferee, CS Docket No. 98-178, Order (reI. May 13,2002) ("AT&T-TCI Order"); see also In the Matter ofApplicationsfor Consent to the Transfer ofControl of Licenses and Section 214 Authorizationsfrom Tele-Communications, Inc., Transferor, to AT&T Corp., Transferee, CS Docket No. 98-178, Order (reI. February 18, 1999) ("AT&T-TCI Merger Order").

4 extinguished. As a result there is no possibility that the existence ofthis right would

allow Verizon to exercise control ofGenuity or discriminate in favor ofGenuity. There

is no "regulatory reason" to maintain the conditions and they should be removed.

III. The Genuity Conditions Should Be Deemed Removed As OfJuly 24, 2002 When Verizon Relinquished Its Right.

Verizon's conditional right to acquire a controlling interest in Genuity was

extinguished on July 24,2002. The Commission should thus deem the Genuity

Conditions removed as ofJuly 24,2002 and should limit Verizon's obligation to

demonstrate compliance with those conditions to the period preceding that date.

Ofcourse, the majority ofthe Genuity Conditions have already been satisfied or

are no longer relevant. For example, Verizon has long since completed the spin offof

Genuity. Merger Order, Appendix B at ~ 2. Some conditions, however, continue to

impose costly and burdensome obligations on Verizon. For example, Verizon is required

to hire an independent auditor to monitor ongoing compliance with the Genuity

Conditions and to prepare and file an annual report on this compliance. Merger Order,

Appendix B at ~ 23; see also Merger Order, Appendix D, Section XXII (outlining

independent auditor requirement for all merger conditions). Verizon is also required to

enter into agreements with Genuity on commercially reasonable terms, Merger Order,

Appendix B at ~~ 20-22, a condition which requires Verizon to comply with various

onerous reporting requirements during the annual audit, including outlining the terms of

any agreements with Genuity (over 300 have been in effect at some point), providing

support demonstrating that the pricing is commercially reasonable, and support for billing

arrangements (including invoices and payment records). And, Paragraph 53 ofAppendix

D continues to require Verizon to provide to the Commission and to the independent

5 auditor certain service quality reports concerning special access services Verizon provides to Genuity and to other nonaffiliates. Merger Order, Appendix D at ~ 53.

Neither the public nor Genuity shareholders benefit from forcing Verizon to adhere to costly conditions that no longer serve any purpose. Thus, Verizon should not be required to either comply with, or to file an annual audit report on Verizon's compliance with, all Genuity Conditions for the period following July 24, 2002.

Conclusion

Verizon respectfully requests that the Commission remove the Genuity

Conditions in the Merger Order. Because Verizon no longer has the right to convert its interest in Genuity into a controlling position, the Genuity Conditions are no longer necessary and should be removed as ofJuly 24,2002 when Verizon relinquished its right.

Respectfully submitted, ~rlJt,

Michael E. Glover Kathleen M. Grillo '-J - Edward Shakin 1515 North Court House Road OfCounse1 Fifth Floor Arlington, Virginia 22201 (703) 351-3071

Attorney for Verizon

November 27,2002

6 Before the FEDERAL COMMUNICATIONS COMMISSION Washington, D.C. 20554

DECLARATION OF STEPHEN E. BOZZO

1. My name is Stephen E. Bozzo. I make this declaration in support of

Verizon's Motion To RelTIOVe Merger Conditions Relating to Verizon's Relationship To

F"i • l T /C.r..F"i • J 'pr\ 1 venuny, Inc. ~--venuny).

2. I am a Vice-President and Associate General Counsel at Verizon. My responsibilities include working on transactions between Verizon and Genuity companies, providing advice on Genuity merger conditions and other legallTIatters involving Verizon and Genuity companies, and working on the annual Genuity merger conditions audit. This declaration is based on personal knowledge and records kept in the ordinary course ofbusiness.

Application ofGTE Corporation, Transferor, and Bell Atlantic Corporation, Transferee, For Consent to Transfer Control, 15 FCC Rcd 14032 (2000). 3. On July 24, 2002, Verizon exercised its right to conve1i all but one ofits

Class B shares into shares ofClass A capital stock giving Verizon an equity interest in

Genuity ofapproxi1nately 9.99%. By this act, as ofJuly 24, 2002, Verizon no longer had

a right to acquire a controlling interest in Genuity by conversion ofClass B shares.

4. Sh01ily thereafter, Michael Masin, who represented the Class B shareholder (that is, Verizon) on the Genuity Board ofDirectors, resigned his seat on the

Genuity Board.

5. On Nove1nber 27,2002, Level 3 Com1nunications, Inc. and Genuity announced an agreement under which Level 3 will acquire certain ofGenuity's assets subject to regulatory and Bankruptcy Court approvals. See Exhibit A (Press Release of

Verizon C01nmunications Inc. dated November 27,2002). Level 3 C01n1nunications will becon1e a supplier ofinterLATA services to Verizon. Verizon does not hold an equity interest in Level 3 Communications.

I declare under penalty ofperjury under the laws ofthe United States ofAmerica that the foregoing is true and correct to the best of n1Y knowledge, infonnation, and belief.

Executed on November 27,2002

2 Company News On Call http://www.prnewswire.com/cgi-bin/stori... &STORY=/www/story/11-27-2002/000 1849270

Verizon Communications Says Genuity, Level 3 Transaction Is in Best Interest of Customers, Creditors

NEW YORK, Nov. 27 /PRNewswire/ -- Earlier today Genuity Inc. filed for Chapter 11 bankruptcy protection. Immediately prior to the filing, Level 3 Communications Inc. agreed to purchase, subject to regulatory and bankruptcy court approval, certain of Genuity's assets and operations, including certain of Genuity's commercial contracts with Verizon. The following response should be attributed to Lawrence 1. Babbio Jr., Verizon vice chairman and president.

"As a significant creditor and customer of Genuity, we fully support this transaction. We are delighted that we've been able to resolve many complex issues in a way that benefits both the customers of Verizon and Genuity, and Genuity's creditors. "We are also pleased that Verizon's willingness to continue existing commercial arrangements with Level 3 enabled Genuity to agree to this transaction. "We look forward to using the services of an existing network provider like Level 3 to supplement and extend our product offerings to our customers."

Click here

SOURCE Verizon Communications Web Site: Company News On Call: Company News On-Call:

Issuers of nml'JlS releases and not PR Nevis~vire are solely responsible for the accuracy of the content

r of 1 11/27/20024:03 PM