A few thoughts on the ATT/IDTC relationship that are not widely known. I have been out helping a friend move all day today and will be doing so again tomorrow but wanted to post a few thoughts on the ATT/IDTC relationship.
In calling around, I have discovered that few people (including the analysts that cover IDTC) have a real feel for what has really been created here recently between IDTC and ATT. Most people are aware that Liberty Media (John Malone)a wholly owned subsidiary of ATT [but completely controlled by John Malone)http://www.libertymedia.com/, purchased 10% of IDTC recently. Most people know that shortly thereafter, ATT bought 14.9M shares of the 25M Net2phone (NTOP) shares that IDTC owned for $75 per share or 1 Billion one hundred Seventeen million five hundred seventy-five thousand dollars.
Few however have read the 8K filed by ATT shortly thereafter and worse yet, IDTC has as of today, not found the time to update the analysts that cover IDTC as to the ramifications. Therefore not many realize that ATT bought an additional 2M shares of IDTC and now controls between Liberty media and themselves close to 15% of IDTC.
The 8K can be found here.
freedgar.com
Now, lets talk about potential and REAL ramifications. First off Liberty media controls content (film libraries, etc.) and ATT broadband, including massive cable and set top box interests. IDTC owns several patents and a company that specializes in encrypted streaming media. IDT owns several data centers fully capable of storing Liberty medias library for online distribution. You can damn well bet that we will be hearing a lot more soon about alliances and
initiatives in this regard. We also know that the company will be reorganizing into sort of a cross between GBLX and CMGI. At that point valuation models will be completely revamped as the company is no longer valued as a clec.
But, for the moment lets strictly talk about the ATT/IDTC relationship that can be determined from the 8 K which contains the following language.
AT&T and IDT have agreed to enter into definitive arrangements whereby for a period of three years:
o each party will become a preferred supplier to the other with respect to all services and products they offer;
o AT&T will supply at most favored customer prices two-thirds of IDT's domestic telephony service needs, long distance, data, IP and local service, subject to existing commitments and provided that IDT will, as a result, experience cost savings;
o AT&T will provide fibre or OC-X service to IDT on a most favored customer basis;
o AT&T will sublease 40,000 square feet (with options to eventually sublease an additional 160,000 square feet) at IDT's facilities in Newark, New Jersey;
o AT&T and IDT will work together to reach an agreement for co-location at each other's facilities; and
o AT&T and IDT will enter into arrangements with respect to the purchase of international services.
Anyone who understand the company knows that IDTC has had problems as any CLEC in the wholesale business has, with deteriorating margins due to competition. Telecom analysts ONLY care about margins I don't care what they say. Just look at how excited they all got last Q when IDT missed the earnings number but margins increased slightly. Well, I've got news for you. The margin problems are a thing of the past. ATT will now be carrying at least 2/3 of IDT's traffic on a "most favored customer basis" That means that IDT's margins will increase by several percentage points. That means that IDTC and ATT will be working together to take on WCOM and IDT will now be on a level playing field with them. No more problems of IDT having to go out and buy circuits on the spot market and having that eat into margins as they struggle to maintain relationships by not turning away business which in the past would have been break even at best. It will ALL be profitable now.
Few people understand that for instance, IDT's 5 cent per minute nationwide plan is no longer competition for ATT. ATT has solved the problem. By buying into IDT and forging these relationships they have guaranteed that the traffic will come to them anyway at a rate they would have charged their best customers anyway and it is a win win because IDTC will be forwarding the traffic on a more profitable basis than before.
Secondly, IDT will be carrying a similar percentage of ATT's International traffic. Once again, few people realize that IDTC has much more favorable termination agreements than ATT does in most foreign Countries. IDTC enjoys this favored status because they are not and never were a monopoly as most foreign telcos are and are not asked for reciprocity on the termination agreements as ATT would be because the USA is a destination Country. This also is a huge win for ATT as they now can originate calls here and route them through IDT for a more favorable termination rate. It's also a win for IDTC as they get a HUGE amount of business and they make money on every single call they would not have before. No additional expenses involved, no capitol improvements needed. The network is already in place etc. A conservative estimate of the amount of new business these two companies will be doing with each other in this regard would be 750M per annum.
Finally, consider why ATT is leasing 60,000 SF of space from IDTC with an option on another 160,000 SF. Does it not seem as though they anticipate a pretty cozy and growing relationship?
At the bare minimum on the telecom side alone analysts can expect a several point increase in margins. Hundreds of millions of dollars in new business ass ATT routes their international traffic through IDTC and I would bet anything an increasing ownership interest from ATT in IDTC as the relationship expands. I would expect this ownership interest to approximately collate with their subleasing expansion needs from IDTC.
Just some food for thought.
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