Global Crosses Into New Frontier In Telecom Deal
Investor's Business Daily, 3/18/99
Author: Reinhardt Krause
Global Crossing Ltd.'s purchase of Frontier Corp. proves that start-ups touting new phone networks crave a big sales force to make their costly buildouts pay off.
A start-up selling phone services via undersea fiber-optic networks, Global Crossing said Wednesday it plans to buy Frontier in a stock swap valued at $11.2 billion.
Global also mulled buying IXC Communications Inc., another long-distance carrier, analysts say.
Frontier gives Global Crossing access to a high-speed data network in the U.S. IXC would have done the same. Frontier, though, has evolved beyond its roots as the local phone company in Rochester, N.Y., and offers Global more pluses, analysts say.
''Frontier can jump-start traffic on Global Crossing's network,'' said Thomas Friedberg, an analyst at Janco Partners Inc. in Denver. ''They will boost Global Crossing's business sales force and retail customer base in a way IXC couldn't.''
Analysts say the Global Crossing-Frontier deal is similar to the smaller Qwest Communications International Inc.'s purchase of the larger LCI International Inc. last year. In terms of revenue, Frontier is more than five times larger than Global. But with its surging stock, Global's market capitalization is more than twice Frontier's. Global's stock traded at about 8 in October, but closed at 56 on Monday. Wednesday, it fell 4 3/8 to 47 1/8.
''Frontier will generate more cash flow for Global Crossing than IXC could,'' said Eric Strumingher, an analyst at PaineWebber Inc. in New York.
Two-year-old Global Crossing is based in Bermuda and in Beverly Hills, Calif. Its founder is Gary Winnick, who helped Michael Milken build the junk bond house Drexel Burnham Lambert in the 1980s.
Last month, Global Crossing hired Robert Annunziata, president of AT&T Corp.'s business services group, as its CEO. Global says its fiber links should span the world's 50 largest cities by mid-2000.
Its prime customers so far are other telecom carriers and Internet service providers, but it plans to sell to businesses and agencies that do a lot of international communication. Frontier's sales force will help greatly, Annunziata says.
''We'll continue to provide wholesale services as we grow rapidly into providing retail,'' said the Brooklyn-born Annunziata in a conference call Wednesday. ''You need to get every bit of traffic, every packet of data traffic, on these networks to make them efficient.''
Global Crossing reported $424 million in revenue last year, compared with just about zip the year before. Frontier's sales rose 9% in 1998 to $2.59 billion. Profit rose 28.5% to $177.4 million.
Frontier operates 34 local phone companies in 13 states. It's among the top dozen local phone carriers and the top half-dozen long-distance providers in the U.S.
Frontier was renamed in 1995, when Rochester Telephone bought long-distance firm ALC Communications Corp., based near Detroit.
In 1996, Frontier acquired part of a national fiber-optic network being built by Qwest for $500 million. Analysts say Frontier's fiber-optic assets made it a takeover target. Fiber optics serve as the speedy backbone, or high-capacity portion, of networks.
Frontier restructured in 1997. To rebound, it focused on high-speed data and Web-hosting services. Data services revenue rose to $97.5 million last year from $22.4 million in 1997.
''Together, we're forming the world's most advanced, global, Internet-based fiber network,'' said Global's Annunziata.
Some analysts think Global Crossing could have done better than Frontier.
''Given their shareholder value, they could have afforded something bigger,'' said Bob Fox, an analyst at Mercer Management Consulting Inc. in New York. ''Frontier is still a minor player in the U.S. market.''
Global Crossing has raised about $3 billion, including $400 million in an initial public stock offering in August, to build its fiber network.
Aside from its undersea lines, Global Crossing is building a land-based fiber- optic network in Europe with several partners.
The system, linking Europe's largest cities, will cost about $700 million. It also announced plans to expand in Japan and South America.
Some analysts like the Frontier- Global Crossing pairing.
''They have a head start building a global (data) network, and that's important,'' PaineWebber's Strumingher said.
Rivals such as MCI WorldCom Inc. and Qwest are pursuing similar plans overseas. At a Merrill Lynch & Co. conference Tuesday, Qwest CEO Joe Nacchio said the firm this year will make a big push in Europe and the Far East.
How many companies can target the global market?
''There's room for at least several of these players,'' said Michele Wolf, an analyst with Bear, Stearns & Co. in New York. ''With data and Internet growth, over the next few years we'll see a big increase in global bandwidth demand.''
Analysts say a suitor may yet surface for IXC, which owns a 10,000-mile fiber-optic network. Some point to the U.K.'s Cable & Wireless PLC , though a recent management shift makes its strategy unclear, says Mercer's Fox.
Less likely bidders for IXC include Level 3 Communications Inc. or Deutsche Telekom AG.
IXC may not be able to be picky. Its loss last year worsened to $162.2 million from $99.2 million. It missed fourth-quarter estimates. |
