Global Crossing and US West to Merge
Creating a $75 billion company with networks linking 19 countries and 185 cities with more than 2.8 million fiber miles and 115,000 route miles, US West Inc. (Denver) and Global Crossing Ltd. (Hamilton, Bermuda) have agreed to merge. Called Global Crossing Corp., the new company will be 50% owned by Global Crossing/Frontier shareholders and 50% owned by US West shareholders. Global Crossing Corp. will establish incorporation in Delaware and headquarters in New York, NY.
This on the heels of ....
Global Crossing Acquires Frontier for $11.2 Billion, Claims Largest Fiber Network
By: Erik Kreifeldt
With the $11.2 billion acquisition of Frontier Corp. (Rochester, NY), Global Crossing Ltd. (Hamilton, Bermuda) now commands "the world's most advanced global IP-based fiber network services," according to CEO Robert Annunziata. "We'll have the largest fiber optic cable-mile network in the world."
Frontier will contribute 20,000 route miles to Global Crossing's fiber network plan, which now consists of 71,000 route miles (more than 1 million fiber miles), and connects 159 cities in 20 countries. Executives estimate that Global Crossing is effectively paying between $4,000 and $8,000 per fiber mile for Frontier's network.
Merely two months ago, Annunziata was quoted in these pages in his former role as President of AT&T Business Services (his previous company, TCG, was acquired by AT&T). AT&T's fiber network sports 41,000 route miles. While Annunziata points out that Global Crossing's network plans are financed, the projects are a long way from complete.
Given the market value of alternatives such as Qwest Communications, they feel that they were are at the low end of the range and therefore got a good deal—despite paying nearly a 40% premium for Frontier's stock. Annunziata cites Frontier's full suite of voice, web hosting, private line, ATM, and Internet services as attractive features. He calculates that the deal increases Global Crossing's addressable market to some $450 billion.
From wholesale to retail
Global Crossing started its enterprise by developing privately-owned transoceanic fiber cable systems from which it sold wholesale capacity. Then it began leasing backhaul circuits (capacity from undersea cable landings to major cities) to bundle city-to-city offerings for its customers. Finally, the developer began building out full-blown terrestrial networks in Europe, Japan, and most recently South America.
With Frontier, Global Crossing gets a North American fiber network, local exchange operations, and a robust web hosting business. "Clearly, [this] fiber optic network in the US puts us in an end-to-end situation globally," Annunziata says. The deal benefits Frontier's business plan with global access (at-cost international transport on Global Crossing's network).
More than half of Frontier's business is wholesale, and more than a third of it serves the retail small-to-medium business market, reveals CEO Joseph Clayton. He says consumer services make up about 13% of the business.
Having once pitched itself as a pure wholesale play that did not compete with its customers (unlike the carrier-consortium-owned cables with which it competed), Global Crossing now positions itself as a multiservice carrier. But Annunziata does not plan to loose any of its core wholesale business.
"If you give the best value, if you give the best proposition, people will buy from you in both wholesale and retail," Annunziata says, adding that retail is an inevitable progression for new carriers, which generally start out as wholesalers. "I don't think there is any company that has been around for more than two years that's still in wholesale," he concludes. "It's just a natural progression."
Clayton will become a vice chairman of Global Crossing. Rolla Huff, who has been named Frontier President and COO, will become president and COO of Global Crossing's North American operations. Four Frontier directors will join the Global Crossing Board of Directors. Frontier's local operations in New York State will continue to be managed out of Rochester, NY, and the transaction is expected to be transparent to Frontier's other local properties.
Financials
On a pro forma basis, the companies' combined current market value is nearly $30 billion, with combined annual sales in excess of $4 billion; earnings before interest, taxes, depreciation and amortization (EBITDA) of more than $1 billion; and more than 8,500 employees.
Frontier shareholders will receive Global Crossing common shares valued at $62 per Frontier share, as long as Global Crossing shares trade within a range of $34.56 to $56.78 per share (the "collar") during a pricing period prior to closing. Outside the collar, Frontier shareholders will receive a fixed number of Global Crossing shares, 1.0919 shares at the top end of the collar and 1.7939 shares at the bottom of the collar.
In connection with the transaction, Frontier has granted Global Crossing an option to acquire up to 19.9% of its outstanding shares at $62 per share as well as a break-up fee if the merger is terminated for certain reasons. Shareholders of Global Crossing representing more than a majority of the voting power of the company have agreed to vote in favor of the merger.
Based on current market prices, the merged company will be approximately two-thirds owned by current Global Crossing shareholders and one-third owned by current Frontier shareholders.
Proponents expect the transaction to close in the third quarter of 1999, qualifying as a tax-free reorganization to the Frontier shareholders. The transaction is expected to be accounted for as a purchase. Upon closing, the transaction is expected to be immediately accretive to Global Crossing's operating cash flow.
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