From FT on BT-AT&T:
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MONDAY JULY 27 1998ÿÿTelecomsÿ
AT&T and BT in joint venture
By Alan Cane in London and Tracy Corrigan in New York
AT&T and British Telecommunications agreed yesterday to pool their international operations in a joint venture which will redraw the balance of power in global telecommunications.
The venture between the largest US long-distance operator and the UK telecoms group will generate an initial turnover of $10bn and handle 25bn minutes of telecoms traffic annually. Michael Armstrong, AT&T chief executive, said: "This is a brand new company we are creating."
The two operators will have equal stakes in the venture, as yet unnamed. At hastily arranged press conferences in London and New York yesterday, the companies said the venture aims to capture a substantial share of the lucrative international traffic generated by multinational companies, by the internet and by telecoms operators.
This business, worth $40bn this year, is expected to grow to $201bn by 2007. Sir Peter Bonfield, BT chief executive, said the figures made the venture "a compelling proposition". John Zeglis, AT&T head of operations, said the joint venture would transform international telecoms. "The bar has been raised permanently," he said.
Mr Armstrong said they would be building a new global network based on the most advanced technology. "We can control the design so we can provide seamless services," he said.
Existing alliances have been criticised for service quality. Charles Coates of the consultancy A.T. Kearney said: "BT and AT&T must find ways of offering these international services at lower cost, and of offering significantly better services."
A chief executive to head the venture is being sought inside and outside AT&T and BT. "We want the best person in the world," Mr Armstrong said.
The companies anticipate the venture will turn over $10bn in its first year, with operating profits of about $1bn. Both turnover and profits are expected to grow annually at 15 per cent or more.
The partners said the venture would lead to a modest increase in earnings from its first full year of operations. Robert Brace, BT finance chief, said he expected a boost of an initial 2p a share in 2000. AT&T said it expected earnings to rise by between five and 10 cents a share in the same period. There is no suggestion, however, that BT intends to return funds to shareholders in the form of a share buy-back.
The venture will combine the cross-border assets and operations of each company, including their existing international networks, all their international traffic and all international products for business customers.
For BT that will mean putting Concert, its existing global alliance with MCI of the US, into the venture. It will buy MCI's stake in the alliance when the US operator concludes its merger with WorldCom, also of the US, later this year. AT&T will have to unravel a number of complex relationships, including WorldPartners, a loose alliance of international operators, and AT&T-Unisource, a partnership with a European telecoms alliance.
Regulators in Brussels and Washington are expected to examine the deal minutely, although Sir Peter Bonfield said he expected the necessary approvals would be achieved in about 12 months.
The deal is remarkable on several counts. First, because it brings together BT and AT&T in partnership when for most of their existence they have been bitter enemies. Second, it introduces a powerful new competitor in global telecoms to take on Global One, the alliance of Deutsche Telekom, France Telecom and Sprint of the US and, separately, Cable and Wireless of the UK, which is developing a relationship with Telecom Italia.
NM Rothschild and Morgan Stanley Dean Witter were financial advisers to BT; JP Morgan advised AT&T.<<<<
Auxilliary articles:
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MONDAY JULY 27 1998ÿÿTelecomsÿ
ALLIANCES: WorldPartners and Unisource to be unravelled
By Alan Cane
AT&T has a great deal of unravelling to do before it can concentrate on its knitting in partnership with BT. The joint venture with the UK group turns on its head its international strategies of the past few years.
It is the leading player in an alliance called WorldPartners in which it has a 40 per cent stake. KDD of Japan has 24 per cent, Singapore Telecom 16 per cent and Unisource, a separate alliance of European operators, 20 per cent. At one time, NTT of Japan became an observing member of the group on a trial basis.
WorldPartners has not, however, proved a success. The chief problems have been: the loose nature of the partnership; AT&T's concentration on its domestic business; and its inability to control service quality across the network.
Service over the new network AT&T and BT are planning will have common design standards and should be easier to guarantee. In the meantime, however, WorldPartners has to be dismantled and the alliance will not be extended beyond the end of 1999.
John Zeglis, AT&T head of operations, said in London yesterday that, first, contracts with the existing members of WorldPartners contained all the necessary conditions to allow graceful disentanglement. Second, that all customer contracts would be honoured throughout the transition period.
AT&T's relationship with Unisource, an alliance between the national operators of The Netherlands, Switzerland and Sweden, is of a different order. The original loose alliance was transformed three years ago when AT&T and Unisource agreed to merge their networks in Europe.
AT&T said yesterday it would exercise its right to quit the alliance by July 2000. Mr Zeglis reiterated that customer contracts would be honoured during the withdrawal.
AT&T's move leaves a question-mark over the future of Unisource, however.
Yesterday, the alliance said it would look for alternatives. "AT&T's decision will necessitate the implementation of alternative scenarios which secure the continuation of serving large multinational corporations," it said.
There have been fears for the future of Unisource for some months. It made a net loss of Fl135m ($67.2m) in 1997 but yesterday claimed the AT&T-Unisource joint venture had been responsible for a large part of the loss.
Unisource was badly damaged last year by the decision of Telefonnica of Spain to leave.>>>>
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MONDAY JULY 27 1998ÿÿTelecomsÿ
DETAILS: Alliance hatched over dinner
By Alan Cane
Michael Armstrong, AT&T chief executive, rang Sir Iain Vallance, BT chairman, last November to suggest dinner. It was only his second day as the head of the largest US long-distance company.
It is unlikely anything as tailored as yesterday's joint venture announcement emerged over that dinner, but the seeds were undoubtedly sown for what could prove to be one of the most far-reaching alliances in telecoms history.
The partners have decided against an exchange of equity to underpin the deal. They have, however, agreed to invest $1bn, equally split between them, in US businesses involved in high technology and communications.
This seems to be part of a joint offensive to cut R&D costs which should contribute to savings synergies of some $3bn a year.
The two companies will be contributing significant revenues and assets. The businesses BT is putting into the venture - including Concert, its existing joint venture - would have had revenues of $2.3bn in 1998. Fixed assets would amount to $1bn.
The businesses being contributed by AT&T had revenues of $5.5bn in 1997 and fixed assets of about $2bn.
The venture is expected to generate profits from three business areas.
* First, global voice and data communications, essentially the provision of advanced communications networks for multinational companies.
This will comprise Concert's current activities together with other advanced networking services from BT and AT&T. Initial turnover is expected to be $3.5bn with earnings before interest, tax, depreciation and amortisation of $1bn. It is expected to grow at 25 per cent a year.
* Second, global sales and services, which will target multinational customers from the financial, petroleum and information technology sectors. Annual revenues of more than $3bn are expected.
* Third, the venture will develop an international carrier business to manage all BT and AT&T's correspondent relationships, the business of carrying other operators' traffic.
The new venture aims to become the leading "carrier's carrier" providing wholesale trans-border services to telecoms companies and internet service providers around the world. Initial turnover is expected to be about $4.5bn.
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MONDAY JULY 27 1998ÿÿLeadersÿ
The new era in global telecoms
Will customers benefit from the new alliance between British Telecommunications and American Telephone and Telegraph? That depends on how the two companies exploit the deal. Regulators should be watchful.
The international telecoms business was founded on collaboration between national monopolies. In the past decade, the emphasis has shifted from collaboration to competition. The new BT/AT&T joint venture is the clearest indication yet of the new model. It will provide international telecoms and value-added services around the globe, in competition with existing operators. And it will exploit the internet technology that is the ultimate competitive threat to the industry's cosy traditions.
Yet it is itself a collaborative venture, between two former competitors. BT was planning to compete - by acquiring MCI - in AT&T's core business, the US market for long distance phone calls. AT&T was not only competing with BT's Concert subsidiary to provide global telecoms services for big companies, it was also threatening to dig up the streets in Britain to construct a rival local phone network.
All these actual and potential competitive threats now vanish. And BT and AT&T seem likely to divide the world up into spheres of influence, with primacy in Europe assigned to BT and AT&T retaining hegemony in the US.
That may not matter. After all, the two companies' home countries are the two most competitive telecoms markets in the world. But the new joint venture will be by far the biggest global network, handling the largest share of international telecoms traffic. This will give it economies of scale that outstrip those of its competition. As the two companies say, this will allow it to offer customers benefits of convenience and price.
From a regulator's point of view, the key to assessing this venture will be the way it exploits those cost advantages. It will clearly be able to undercut its rivals, but it must be pressed to do so to the maximum amount possible. The risk is that it will price its calls just below its rivals but well above its costs. That would be a case of exploiting a dominant market position to swell profits.
Heaven forbid, say the partners. The venture will charge its parents a rate for international calls based on its costs plus a small margin. Other operators will have access to the same rate - but volume discounts will apply. This approach will bring the benefits claimed only if the discount does not favour the parents too heavily.
The venture deserves credit for grasping the new technological and commercial possibilities of the internet. It is not inherently anti-competitive. But the details of how it plans to work will repay close scrutiny by regulators.
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MONDAY JULY 27 1998ÿÿTelecomsÿ
ANALYSIS: Deal completes reformation of AT&T
Agreement will enable US company to provide multinational clients with top drawer international services, writes Tracy Corrigan
What a difference nine months make. When Michael Armstrong took the helm of AT&T at the beginning of November, the company was seen as a utility industry laggard with a broad range of strategic problems.
Mr Armstrong has now completed three landmark deals in less than a year in an effort to reposition the company. According to one person close to yesterday's agreement with British Telecommunications, "the reformation is complete".
Many analysts say that the most severe problem facing Armstrong when he took the reins was in the local market in the US. Until the US telecoms legislation of 1996, there was a strict division between local and long-distance carriers.
When that was shattered, AT&T faced a market in which local carriers could compete for its business, but it did not have direct access to customers. AT&T's acquisition of Teleport gave it a strong base in the local market for big business customers.
Last month's $45.5bn agreement to buy TCI has proved more controversial. The cable giant will give AT&T important access to infrastructure, which is crucial for satisfying the needs of its vast domestic residential customer base. But analysts have expressed concerns, from the big increase which will be needed in AT&T's capital spending budget, to the complexity of the structure of the deal, which includes the issuance of "tracking stocks" to reflect the performance of different parts of the group. People at the company hope that once all the details of how the deal will work are out, Wall Street will be talked around. (The deal has yet to gain regulatory approval.)
This left AT&T's international strategy. With a stroke of the pen, that has been transformed by yesterday's agreement with BT. Although AT&T already had an array of alliances in the international market, it had a big problem. "They haven't had control over the infrastructure," said one person close to the transaction.
What that means is that AT&T has been able to offer a full range of international services to large multinational corporate clients, but has had to rely on partners whose services were in some cases distinctly sub-par.
The BT deal "gives them, starting today, a single vehicle to provide true end-to-end service for those customers". As a result, the company's share of the international spending on telecoms by multinational giants, a lucrative sector of the market, will, it is hoped, rise. Analysts say that a strong presence in this sector is important not only because it is lucrative but also because it is "a cutting edge business" where technological innovation is often focused.
Although BT's own international strategy has been nothing to phone home about, it does enjoy strong distribution in Europe. "It's there, it's built, the distraction away from domestic issues [for AT&T] is minimal," said the person close to the deal.
What is less clear is whether the deal could be a precursor to a full-blown merger. Some say the agreement has allowed AT&T to cherry-pick the BT assets it is interested in and that moving further is not necessarily an obvious step.
But others point to the failure of many international joint ventures in the telecoms industry, suggesting there may be an all-or-nothing dynamic at play in the longer term.
The BT agreement is just the latest in a series of dramatic moves in the US telecoms industry, including the merger of MCI and WorldCom. AT&T's efforts have come rather later in the game than, for example, WorldCom, whose leader, Bernie Ebbers, has used the company's strong stock price to fund a wave of deals, building the company from scratch.
Mr Armstrong has not had the luxury of a strong stock price, making his task, arguably, all the harder. And after the 1996 changes, the long-distance carriers such as AT&T were left in the weakest position, with no direct access to American homes. As well as having to compete with local companies, AT&T found a new threat from the likes of WorldCom, focusing on the business sector of the market.
Although the BT arrangement is something of a catch-up, AT&T still faces in WorldCom a competitor which has now built its own network from scratch in Europe. This means that in the long term it may be able to earn higher margins than others because it does not have to pay fees to other phone companies.
But the latest deal is also likely to cause some heartache for competitors, particularly Sprint, whose Global One alliance with France Telecom and Deutsche Telecom has been problematic.
One thing seems certain. With the ink on a handful of deals still not dry, there are already more mergers and alliances in the offing.
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