Telus's new motto: Dial M for merger
(This article from the Globe & Mail is of interest for us as background and the comment from Alan Lutz during the AGM that he expects increased revenue from Canada this year, Regards Glenn)
COMMUNICATION BREAKDOWN
Canada's Stentor alliance has been been dealt a lethal blow
and the phone industry has been forced to change by the
maverick company's acquisitive ways, this time through a
proposed BC Telecom union.
Saturday, October 17, 1998
MARK EVANS
Technology Reporter
George Petty, the determined head of Telus Corp., is sending tremors through Canada's telephone industry again.
Seven months after merger talks with AT&T Canada Long Distance Services Co. fell apart, Mr. Petty and Telus are once more
looking to combine forces with another telecommunications company -- this time with BC Telecom Inc.
There's no deal yet, but Mr. Petty's big ambition is shaking up Canada's telecommunications sector and is setting the stage for even
more intense competition for the lucrative corporate market.
With Telus's proposed merger with BC Telecom, Mr. Petty aims to create a Western Canadian powerhouse that analysts expect will
likely trigger a wave of deals, alliances and partnerships as rival telephone carriers -- including giant Bell Canada -- jockey to remain
competitive.
The merger of Edmonton-based Telus and Burnaby, B.C.-based BC Telecom would create a company with 25,000 employees and
$4.8-billion in annual revenue -- a little more than one-half the revenue of Bell Canada, which had revenue of $9.2-billion in 1997.
In the short term, the marriage of Telus and BC Telecom would allow the firms to fend off Bell Canada's Jan. 1 launch of a
high-capacity national network for business customers.
The fight for corporate business is at the heart of both Bell's new network and the proposed Telus-BC Telecom merger.
The long-term strategy of such a union is an unknown at this point, with speculation rampant about how -- or even if -- the company
would establish a national network to serve its large business customers.
The possible merger has a lot to do with Mr. Petty's frustration with Stentor, a 66-year-old consortium of Canada's 11 largest phone
companies.
Although Stentor is technically a partnership of equals, the roost was ruled by BCE Inc.'s Bell Canada unit, and the consortium's other
members were expected to quietly fall in line.
This arrangement was unacceptable to Mr. Petty, who believed Telus could not enjoy strong growth because it couldn't expand into
the markets of other Stentor members.
That cozy relationship is on the verge of extinction, a result of Telus's attempted merger with AT&T. The latest proposal to combine
with BC Telecom is sure to add fuel to the fire.
If Telus and BC Telecom tie the knot, the key question is: What happens next?
"This is certainly round one in a multiround approach," said Iain Grant, managing director with Seaboard The Yankee Group in
Brockville, Ont. "Telus has to demonstrate to its customers that it can deliver products and look after their needs from sea to sea. We
think [Telus's next step would be] a partnership or marketing relationship with AT&T or Sprint [Canada Inc. of Toronto]. That's the
next shoe to drop."
Whether Telus or another carrier is the bidder, the possibility of more mergers or acquisitions has caught the imagination of investors,
who have driven up the share prices of Call-Net Enterprises Inc., MetroNet Communications Corp., Microcell Telecommunications
Inc. and Clearnet Communications Inc. as they speculate about which carrier could be the next target.
There certainly are enough scenarios to get corporate finance executives salivating at potential transaction fees, and industry analysts
busy providing advice to investors.
Dvai Ghose, an analyst with HSBC James Capel Canada Inc. in Toronto, said the ideal sequence of events would see Telus and BC
Telecom merge and then buy Call-Net, which owns Sprint Canada. That would give it a nation-wide presence and a large
long-distance provider.
"There is a lot of crystal ball gazing going on, but I am presenting . . . a strategy that makes the most sense," Mr. Ghose said, adding
that he doubts Call-Net shareholders are ready to sell.
Juri Koor, Call-Net's president and chief executive officer, is keeping his cards close to his chest. The ball, he said, would firmly be in
Telus-BC Telecom's court if they wanted to pursue a deal for Call-Net.
"These deals are only about money," he said. "If [Telus and BC Telecom] put their deal together, they will have to compete across
Canada in local and long distance. There is always the issue of, 'Do you build it yourself of buy it?' Buying is faster."
The speculation about further mergers and acquisitions overshadows the possibility that Telus-BC Telecom and other carriers looking
to offer nation-wide service will instead enter into alliances.
"One of the most interesting things out of the consolidation and competition in the United States is, in a lot of ways, carriers who are
competitors to the end client are customers to each other behind the scenes," said George Cope, president and chief executive officer
with Toronto-based Clearnet.
MetroNet, which provides local service to corporate customers in eight cities, said the merger mania puts its business in a win-win
situation.
Despite the hype surrounding Bell Canada's new national network, Bruce Mann, MetroNet's vice-president of investor relations, said
the giant can't offer local service outside Quebec and Ontario. The lack of local coverage nationally, he said, would force Bell Canada
to use companies such as MetroNet to carry local traffic.
"We've got the assets to provide local service to them on a wholesale basis," Mr. Mann said. "It's a huge opportunity above and
beyond what we've got going. We've always said the market would develop huge wholesale opportunities and you're about to see it."
MetroNet's willingness to strike a deal with Bell or any other Stentor member illustrates the increasing irrelevance of the consortium.
The Telus-BC Telecom deal is just the latest blow to the quickly disintegrating Stentor, the latest incarnation of which was established
in 1992 as a way for the country's 11 provincial phone companies to provide common marketing and pricing programs.
Stentor's viability was dealt a significant blow last month when it dissolved two of its four units, a move that reduced its work force to
800 from 1,800. The restructuring meant that Stentor's members had abandoned their agreement not to compete against each other.
The decline of Stentor also means Bell Canada's enormous influence over the industry is quickly waning, said Ian Angus, president of
consultant Angus Telemanagement in Ajax, Ont.
"Bell Canada has set the agenda for the telephone industry in Canada," Mr. Angus said. "They have generally set the rules, but now
you will have someone else very large and credible whose views don't align with Bell's."
Now, it is Mr. Petty, not Bell, that seems to be dictating the pace of change in the industry.
In March, Mr. Petty changed from being a disgruntled insider to a rebel when Telus confirmed it was negotiating a merger with AT&T
Canada. Although that merger failed to materialize, Telus's aggressive tactics signalled to other carriers that their $17-billion industry
was changing -- and they needed to move to keep pace.
Call-Net wasted little time in trying to jump ahead of the pack by making a $1.6-billion hostile bid for Montreal-based Fonorola Inc.
in mid-April -- a move that surprised many analysts and investors, even though there has been a wave of multibillion-dollar deals in the
United States in recent years.
Mr. Koor said the deal was crucial to bolster Call-Net's long-distance business and to give it the clout to compete. Fonorola's
shareholders accepted a sweetened $1.8-billion offer in June, which propelled Call-Net ahead of top-ranked AT&T Canada.
Telus's talks with AT&T Canada and Call-Net's purchase of Fonorola made Bell Canada, which offers local and long-distance
service in Ontario and Quebec, realize it needed its own national network to keep large corporate customers and attract new
business.
After buying fibre-optic lines from Fonorola, Bell Canada announced plans for a $750-million national network -- dubbed Natco --
that would allow it to circumvent its long-distance revenue-sharing agreements with Stentor's other members.
The evolution of Canada's phone industry took another step forward earlier this month when the Canadian Radio-television and
Telecommunications Commission ended Montreal-based Teleglobe Inc.'s half-century monopoly on international long-distance
business.
A key part of the CRTC decision is the allowance of domestic long-distance phone companies to route Canadian phone calls through
the United States. That means Telus-BC Telecom, for example, could send traffic from British Columbia and Alberta using a U.S.
carrier that has excess capacity on its fibre-optic network.
Before the decision was made, Teleglobe had already moved in a new strategic direction by entering the U.S. and European markets,
which eventually led to a merger agreement with Dallas-based Excel Communications Inc. in June.
The merger is expected to be completed later this year, and would create the fourth-largest telecom carrier in the North American
long-distance market, with combined annual revenue of $5-billion, almost six million residential customers and about 65,000 business
customers.
In the wake of the aborted talks between Telus and AT&T Canada, most industry watchers caution that the Telus-BC Telecom
merger shouldn't be considered done until both sides sign on the dotted line.
"I think [the merger is] likely to be completed, largely because there are some strong motivators here," said Eamon Hoey, a
telecommunications industry consultant and president of Toronto-based Hoey Associates Inc. "From Telus's position, it would like to
protect the wind to its back because it doesn't want to fight on two fronts -- by being occupied by BC Telecom on one side and Bell
on the other."
An intriguing subplot to the proposed Telus-BC Telecom deal is determining the role of Stamford, Conn.-based GTE Corp., which
owns 50.8 per cent of BC Telecom, as well as QuébecTel Group Inc.
GTE is the only foreign company to own a majority stake in a Canadian phone carrier because its investments were made before limits
on foreign ownership were established by the federal government.
If GTE, which is the subject of a $53-billion (U.S.) takeover bid by New York-based Bell Atlantic Corp., doesn't oppose the merger
with Telus, its stake in BC Telecom would drop to 25 per cent. That would allow it to fall under Canada's 33-per-cent foreign
ownership limit.
Angus Telemanagement's Mr. Angus said it probably makes more sense for GTE to own 25 per cent of an entity with strong growth
prospects than 50.8 per cent of one with limited opportunities.
If the Telus-BC Telecom transaction is completed, Mr. Angus expects that QuébecTel will be part of the deal.
While there are many uncertainties about how the competitive landscape will evolve, Doug McCuaig, a partner with Ernst & Young in
Toronto, said the market trends globally suggest there will be a few large international players and a few large national players in each
country.
"One of the things you can count on is that BCE and Bell will not go away, and they will increase their scope on an international basis."
PHONE WARS
THE BATTLE SO FAR
-*Jan. 1, 1998: Local competition allowed to begin. Year starts with mega-mergers looming in the telelcommunications industry --
WorldCom's $30-billion (U.S.) bid for MCI is pending.
-*March 24: Telus confirms merger talks with AT&T Canada Long Distance Services Co.
-*April 15: Call-Net makes $1.6-billion bid for Fonorola.
-*April 17: Telus talks with AT&T break off. Just days later, Bell Canada said it had recently acquired fibre-optic lines and planned to
build a national, Internet based infrastructure under a new company so far known only as Natco.
-*May 20: MetroNet buys Rogers's local network business for $1-billion.
-*June 26: Call-Net acquires Fonorola for $1.8-billion.
-*Sept. 18: Stentor consortium dissolves two of four units.
-*Oct. 1: Teleglobe's overseas long-distance monopoly ends.
-*Oct. 14: Telus and BC Telecom confirm they are in merger talks.
-*Jan. 1, 1999: Bell Canada's Natco to open doors.
-***
BY THE NUMBERS
Telus is shaking up Canada's phone industry once again with its bid to merge with BC Telecom. Yet even if Canada's second and
third-largest phone companies pull that deal off, their combined revenue of $4.8-billion will still pale against giant Bell Canada. The
merged company would have the clout to do a deal with either of the smaller rival long-distance phone companies who, in turn, have
the national networks BC Tel and Telus need to take Bell on in eastern Canada.
-***
Operating revenue, $billion, 1997
Bell Canada $9.2
BC Telecom and Telus $4.8
BC Telecom $2.8
Telus $2.0
Call-Net Enterprises
(Sprint and Fonorola) $1.3
AT&T Canada Long Distance $1.0 (est.)
Report on Business Company Snapshots are available for:
TELUS CORPORATION
BC TELECOM INC. |
