GBLX--one of my fav's making a big acquistion
March 17, 1999
Global Crossing Forges Agreement
To Buy Frontier for $11.2 Billion
By STEVEN LIPIN and STEPHANIE N. MEHTA
Staff Reporters of THE WALL STREET JOURNAL
Global Crossing Ltd., a high-flying telecom upstart, reached an agreement to acquire Frontier Corp., a local and long-distance carrier, for $62 a share, or $11.2 billion in stock, according to people familiar with the matter.
The boards of the two companies met Tuesday to approve the deal. An announcement is expected as early as Wednesday, the people said.
Global Crossing and Frontier declined to comment.
Frontier Shares Jump
The deal's price represents a 40% premium over Frontier shares' closing price Tuesday of $44.625, up 5.8%, or $2.4375, in New York Stock Exchange composite trading. Global Crossing shares fell $5.0625, or 9%, to $51.50 in Nasdaq Stock Market trading.
A transaction would give Global Crossing, based in Hamilton, Bermuda, a foothold in the important U.S. market. Almost two years old, the company is in the process of building a fiber-optic network that will carry voice and data traffic around the globe. Most of the construction so far has involved undersea cables and a pan-European network.
Frontier is the incumbent local phone company in Rochester, N.Y. But it is also one of the nation's largest providers of domestic long-distance service, competing with AT&T Corp., Sprint Corp., and MCI WorldCom Inc. It offers Global Crossing a "next generation" network based on Internet technology, not unlike the network Global Crossing aims to build. Frontier also serves small to midsize businesses that could use Global Crossing's network.
Global Crossing is putting in place the assets and people to become a formidable competitor in the global telecom market. Indeed, Robert Annunziata, a former top executive at AT&T, came on board as its chief executive officer just a few weeks ago. Mr. Annunziata built Teleport Communications Group before selling the local-exchange carrier to AT&T for $12 billion in 1998. In the current deal, Frontier's chief executive, Joseph P. Clayton, will become a vice chairman of Global Crossing.
Using Stock as Leverage
Assuming the deal is completed, Global Crossing will become the latest telecom upstart to buy a bigger rival.
Valued highly by Wall Street for their new technologies or their construction of new networks to handle the swelling data traffic created by the Internet, these companies are able to use their stock to buy more established carriers. Qwest last year acquired LCI International using the strategy, and WorldCom grabbed MCI Communications out from underneath British Telecommunications PLC through the use of its powerful currency.
Global Crossing trades at a lofty 40 times cash flow, while Frontier trades at 11 to 12 times cash flow, giving the buyer the financial wherewithal to make the deal.
Global Crossing, which has about 200 employees, went public in August at a split-adjusted price of $9.50. It now has a stock-market value of $21.5 billion. The company is on track to achieve $1 billion in revenue this year.
Frontier is much bigger in terms of revenue. It was founded in 1899 as Home Telephone of Rochester and went public in 1944. The company boasts over 8,000 employees and a market value of about $8 billion. Its revenue last year totaled $2.6 billion.
Together, the combined companies in 1999 would have revenue of more than $4 billion and a pro-forma stock-market value of nearly $30 billion.
The transaction would boost Global Crossing's cash flow per share, according to people familiar with the matter. However, the accounting method the company is using-so-called purchase accounting-would result in goodwill charges that would hurt its reported earnings, these people say.
Global Crossing plans to pay $62 a share for each Frontier share, so long as shares of Global Crossing trade between $34.56 and $56.78.
Frontier recently reversed its disappointing financial performance, thanks to a major restructuring announced in 1997. The company brought in Mr. Clayton, an electronics executive, who shed underperforming assets and shifted senior managers. It also focused on building its national fiber-optic network, which moves telephone traffic more efficiently. As a result, the company has been viewed as a potential acquisition candidate for a Bell operating company or another carrier seeking a long-distance presence in the U.S.
By acquiring Frontier, however, Global Crossing will move into the fiercely competitive business of telecom retail. Until now, the company has operated as a wholesaler, selling capacity on its networks to the likes of MCI WorldCom and Germany's Deutsche Telekom.
Together, the companies will connect 159 cities world-wide with more than 71,000 miles of fiber. Global Crossing, combined with Frontier, will be in a position to sell telecommunications services directly to multinational corporations, customers that are much sought after. Analysts say the top 50,000 global corporations account for about one-fourth of the world's telecommunications traffic.
Global Crossing still faces a challenge in connecting directly to U.S. customers in cities outside Rochester. While Frontier has customers nationwide, its local connection to those customers has been achieved mainly by relying on local Bell telephone lines. It is a strategy that can be costly, and Global Crossing will need to either build or buy additional local networks.
Global Crossing was advised by Merrill Lynch & Co., Salomon Smith Barney Inc., Chase Securities Inc. and the law firm Skadden, Arps, Slate, Meagher & Flom. Frontier was advised by Morgan Stanley Dean Witter & Co. and Simpson Thacher & Bartlett.
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