GLOBAL CROSSING JUMPS INTO RETAIL WITH U S WEST MERGER
May. 24, 1999 (FIBER OPTICS NEWS, Vol. 19, No. 21 via COMTEX) -- Bermuda-based Global Crossing [GBLX] has shifted gears, moving into a new business strategy. The international telecommunications carrier May 17 announced it will merge with Denver-based U S West [USW], an incumbent local exchange carrier.
The move signals a new corporate vision for Global Crossing, considered to be a carrier's carrier until recently. Now, on top of trying to sell bandwidth to carriers, the company will sell local voice services and long distance to end users. Global Crossing indicated this might be the case in mid-March, when it announced it would purchase Frontier Corp. for $11.2 billion in Global Crossing stock. Frontier has an extensive retail business. Now Global Crossing is preparing to lap competitors.
But is the jump into retail a wise move for Global Crossing? Craig Johnson, principal at PITA Group, a high-tech consultancy in Portland, Ore., says the purchase of U S West is a flash of brilliance. "The players that will win in the long haul are the players that have end users," Johnson says. "Carrier's carriers can negotiate 10-year back-haul deals but the margins there are growing thinner and thinner. With end users, you always have the possibility of offering new services on top of older services, and building customer relationships. Global Crossing would be buying a set of customers that can generate revenue."
Johnson says the purchase will leave companies like Qwest Communications [QWST] of Denver and Williams Communications [WMB] of Tulsa, Okla., scrambling for end users.
Jeffrey Kagan, president of telecommunications consultancy Kagan Telecom Associates in Marietta, Ga., also sees the deal as a grab for customers. "We are seeing the new breed of phone company merge with the incumbents to be able to have the best of both worlds -- new technologies and all the customers," Kagan says.
However, Michael Ruddy, senior fiber optics analyst at telecommunications consultancy Pioneer Consulting in Cambridge, Mass., thinks the acquisition is risky. "Global Crossing has been doing so well with the carriers' carrier model, you do have to ask, 'Why take the risk?' Ruddy says. "This appears to be Global Crossing saying, 'We want to become an AT&T [T].' They are positioning themselves against the incumbent [local exchange carriers] and the AT&Ts, which are their potential customers." In a word, Global Crossing could alienate their customers in the carriers' carrier business.
The stock market has offered a sluggish reaction to news of the merger. Global Crossing's stock fell from $61.38 May 14 to $58.69 May 18. U S West's stock slipped from $62.25 to $54.31.
Taking Stock
Under the terms of the merger, U S West will buy 9.5 percent of Global Crossing stock, or approximately 39 million shares, for $2.45 billion. The new company will be 50 percent owned by Global Crossing and Frontier shareholders and 50 percent owned by U S West shareholders.
Global Crossing and U S West plan to create two separate trading stocks to give investors a choice of high-yield or lower-yield options. "In terms of the global services providers [class G stock] we are talking about the Global Crossing subsea and terrestrial fiber optic network," says Solomon D. Trujillo, chairman, president and CEO of U S West. "We are talking about the U S West !nterprise data activities. We're talking about the Frontier U.S fiber network; the Internet data and long-distance capabilities of all entities."
The second stock is called class L, for local service provider. Under it, Global Crossing will report on its incumbent LEC activities.
Global Crossing, U S West and Frontier had combined 1998 sales in excess of $15 billion and earnings before interest, taxes, depreciation and amortization (EBITDA) of more than $6.2 billion. The combined companies currently have more than 115,000 route miles of fiber.
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