News from FT:
WEDNESDAY DECEMBER 9 1998 Americas
TELECOMS: AT&T buys IBM data network
By Richard Waters in New York
Michael Armstrong extended the rapid-fire series of acquisitions and joint ventures made since he took charge of AT&T a year ago, this time agreeing to pay $5bn for a worldwide data network run by IBM.
Yesterday's deal is likely to play a central part in the US telecommunications company's attempts to raise its presence as a provider of internet services, particularly to large multinational companies - an area in which it has lagged well behind rivals such as MCI WorldCom.
Although the price is considerably more than the network had been expected to fetch, the strategic significance of the deal gave a big lift to AT&T's share price yesterday, boosting the stock nearly 5 per cent during morning trading. It closed up $2 3/16 at $66 15/16.
The acquisition, along with this year's joint venture with British Telecommunications, would provide the platform for the US company's inter-national growth, said Mr Armstrong, the chairman. "AT&T was a domestic company. We have just repositioned it as a global player," he added.
The deal follows an auction of the data network by IBM, which decided earlier this year to concentrate its resources on areas which were more central to its business.
Lou Gerstner, IBM chairman, said the operation had been developed during the 1980s at a time when telecoms companies were either uninterested in or prevented by regulation from assembling cross-border data networks. With the biggest telecoms companies now seeing this as central, and with large investment needed to maintain a technological lead, IBM had decided to beat a retreat, he added.
The purchase will bring AT&T a business with annual revenues of $1.5bn, 5,000 employees and what it said were "several hundred" large companies as customers. The network is also said to carry internet services for more than 1 million individuals.
Many of the facilities in the network are leased from telecoms companies around the world, although AT&T will acquire the routers and switches that direct traffic.
Mr Armstrong said the purchase would give an immediate boost to the BT joint venture. IBM's network already extends to 93 of the 100 international cities that the two had earmarked for the initial $5bn phase of their expansion over the next three years.
AT&T and IBM also announced a series of "outsourcing" arrangements, with IBM agreeing to pay AT&T $5bn over the next five years to carry its own data traffic and AT&T paying IBM $4bn over 10 years to handle some of the software applications of the network and manage its data processing centres.
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WEDNESDAY DECEMBER 9 1998 Americas
ESPRIT TELECOM: GTS pays $750m for rival
By Alan Cane in London
Global TeleSystems, a US-based telecoms group with most of its operations in eastern and central Europe, is buying Esprit Telecom, one of Europe's new alternative operators, for $757m.
The deal combines two of Europe's fastest-growing independent operators both providing a broad range of services to business, including voice, data and internet services. They have been fierce competitors, but will create a company with an estimated market value of $4.1bn. It is a first sign of consolidation within the European telecoms industry after almost a year of market liberalisation. It also bears out analysts' predictions that companies owning a networking infrastructure will become increasingly attractive as acquisitions as the market matures.
The combined group will have around 3,000 employees, more than 35,000 business customers in western Europe and a network with more than 9,200km of high-capacity fibre cabling.
Neither GTS nor Esprit is profitable, as they are still in their development phase. They are listed on Nasdaq and Easdaq and may seek a listing on the London stock exchange, where the combined group could qualify for the FTSE 100.
GTS has proposed to exchange 0.89 shares of its stock for each Esprit Telecom American Depositary Share. Based on GTS's closing common stock price of $41.75 on Monday, the offer values each Esprit ADS at $37.16 and represents a 22.8 per cent premium, the companies said. The deal is expected to be accounted for as a pooling of interests, which confers significant tax benefits. Although pooling of interests is common in the US, it will be the largest US/UK deal to be treated in this way.
Some 65 per cent of the holders of Esprit voting stock have irrevocably agreed to the offer. Walter Anderson, the company's former chairman, who lost a boardroom dispute last month over management, is to serve as special consultant to the GTS board of directors.
David Oertle, Esprit chief executive, will stay with the company during the transition working directly with Gerald Thames, GTS president and chief executive.
Mr Thames said the companies shared a similar vision and culture. The aim was to create the leading provider of "carriers' carrier" and business telecoms services across Europe. Carriers' carriers are the wholesalers of the industry, selling capacity on their networks to other operators.
The deal is subject to shareholder approval.
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WEDNESDAY DECEMBER 9 1998 UK & Ireland
TELECOMS: Fierce rivals discard differences
Alan Cane reports on consolidation in the telecoms sector following the merger between Global TeleSystems and Esprit
Serendipitously, two separate deals - the acquisition of Esprit Telecom by Global TeleSystems and the sale of IBM's global network to AT&T - were both announced yesterday, underlining the uncompromising economics of telecommunications.
To be viable in the current competitive environment, an operator has to be big, to own its own facilities - which give it control over the price and quality of its services - and to be active in more than one area.
"This is all about securing traffic to fill the networks," said David Cleevely, managing director of Analysys, the Cambridge-based telecoms consultancy.
The merger between GTS and Esprit satisfies all the criteria and promises the emergence of a formidable force in European telecoms, the more so because both are already prominent on the European stage.
Until now, the two companies were the fiercest of rivals. Last month, Esprit raised the stakes with the formation of a new division, Esprit Telecom Networks, which would have been a significant challenge to GTS's "carriers' carrier" business, which provides other operators with extra transmission capacity.
Together, the two companies' chief rival on the pan-European stage is now MCI-WorldCom, another operator which owns and manages its own facilities.
Last month, in a deal with strong similarities to the GTS/Esprit merger, KPN, the Dutch national operator and Qwest, a rapidly-growing US operator, said they intended to create Europe's largest network for internet traffic.
Reviewing the merged companies' goal of becoming Europe's pre-eminent provider of carriers' carrier and business communication services, David Oertle, Esprit chief executive, observed: "We each could have done this separately, but it would have taken us three years longer."
The combined group will have an immediate presence in 19 European countries, a broadband, high technology, network of more than 9,200km and some 35,000 business customers.
It will benefit from the economies which flow from owning its own network based on high capacity, "self-healing" SDH technology, the system of choice for the growing data transmission market.
Much of the network will be equipped with a new technology called wave division multiplexing that will increase its capacity many times and give the company the potential to undercut rivals on price.
And it will be able to offer all the principal telecoms services to its business customers, including voice, data and the internet.
GTS, jokes Jerry Thames, chief executive, is the first telecoms operator to begin operations in eastern Europe and spread west.
Founded in 1987 and based in Washington DC, GTS is quoted on Nasdaq. It is an independent developer, owner and operator of telecoms companies in Europe and Asia. Its first operations were in Russia and it retains significant strength in eastern Europe.
It is best known for 86 per cent ownership of Hermes Europe Railtel, a company established in conjunction with 11 European rail groups as one of the first pan-European carriers' carriers, selling capacity on its advanced fibre network laid alongside rail tracks.
Hermes has a partnership agreement with Cable and Wireless of the UK, through which it will help the UK operator develop its European network.
GTS this month acquired Netsource Europe, a pan-European operator based in Kristiansand, Norway, catering chiefly for small and medium-sized businesses. Earlier, it bought Ebone, one of Europe's largest internet backbone providers, the conduit for the bulk movement of internet traffic.
Esprit, quoted on Nasdaq and Easdaq, began operations in Europe in 1992. Founded by Walter Anderson and Michael Potter, the company has been frequently in the news because of Mr Potter's trenchant views on competition and regulation in Europe.
More recently there has been a bruising boardroom dispute which resulted in Mr Anderson, the former chairman, losing the battle to remove a number of directors including the new non-executive chairman, Sir Robin Biggam, chairman of the UK Independent Television Commission.
Mr Anderson, who has an interest in some 26 per cent of Esprit shares, has agreed to act as special adviser to the newly merged company.
Esprit's founders gambled that European market liberalisation and the collapse of the old telecoms monopolies would yield dividends. Mr Oertle said this year that the market had opened up far more quickly than he had expected.
The GTS/Esprit and KPN/Qwest deals indicate that consolidation in the European industry is a reality. It also suggests that the present shortfall in data transmission capacity across Europe will ease. But if the growth in data fails to match the growth in capacity, further consolidation will leave a few large groups fighting over distinctly thin pickings.
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