No walk in the park

Telecommunications, Jan, 2001 by Graham Wilde

The merger of Equant and Global One only serves to highlight the difficulties in making money out of selling telecoms services to MNCs.

The announcement on 20 November that the data operations of Global One would be merged with those of Equant is the latest in a long story which has seen many telecoms giants try - and largely fail -- to make a profitable business out of selling global telecoms services to the world's largest companies.

Under the deal, Equant will acquire the corporate data services business of Global One, together with US$300 m ([epsilon]330 m) in cash, in exchange for 80.6 million newly issued ordinary shares in Equant. France Telecom will retain Global One's calling card and voice businesses and purchase the SITA Foundation's 68 million shares in Equant, giving one France Telecom share for every 2.2 Equant shares.

France Telecom will invest US$1 bn ([epsilon]1.1 bn) into the combined business in exchange for ten million new Equant convertible preference shares, which will convert into ten million new ordinary Equant shares at a price of US$100 ([epsilon]l10 per share) five years after the agreement.

The deal leaves France Telecom in control of the merged businesses of Equant and Global One, which will retain the Equant name. From a financial perspective, the merger is a neat deal for France Telecom. Global One -- originally a joint venture between itself, Deutsche Telecom and Sprint -- never made money. Now the French carrier has control of a much larger business (but still a loss maker), without increasing the debt on its balance sheet.

It also removes one competitor from a crowded field which includes the likes of Cable & Wireless, MCI Worldcom, Concert and Infonet on a global scale, not to mention aggressive regional carriers such as Telstra.

Yet at the same time, the deal underlines a fact that few would have believed three or four years ago -- that making money by selling global services to MNCs is a surprisingly difficult game. Why should this be so?

Historical difficulties

In the mid-1990s, the common wisdom was that in a few years' time -- probably by now -- there would be only a handful of telecoms operators who would dominate the market. Certain former monopoly operators, including BT, were determined that they would be among the last ones standing and set about creating a global strategy. BT bought stakes in numerous overseas operators and set about taking control of MCI, with whom it created Concert. But final control of MCI was snatched away from it by Worldcom, so BT was forced to recreate Concert as a partnership with AT&T.

Other carriers were equally unsuccessful. The partnership behind Global One collapsed following MCI World-com's attempted takeover of Sprint and a well publicised row between France Telecom and Deutsche Telekom over the latter's failed bid for Telecom Italia. Unisource, a partnership between some of Europe's junior carriers, also floundered due to disagreements between the owners and a general lack of critical mass.

Corporate customers have become justifiably concerned over the control and direction of their global telecoms suppliers. Alliances and JVs may look good on paper, but they can apparently fall apart as easily as they are created. For this reason, many customers have given qualified approval to the merger of Equant and Global One. Ed Vonk, service development manager for Shell in the Netherlands and a member of the European Virtual Private Network Users' Association, said: "This is a positive move. It is a step toward the development of a global arena." He added that "single ownership gives them a solid base, different from international alliances such as Unisource". Only Concert now remains as an alliance organisation among the major world carriers.

Being alliance-free allows global carriers the freedom they need to make investment and expansion decisions without the fear that one of the partners will balk at the costs. It does not, of course, guarantee that they will make money. Equant's revenues have shown steady quarter-by-quarter growth over the last two years, yet the company has never made an operating profit (Table 1).

The France Telecom deal should yield savings in investment and operating costs. France Telecom chairman and CEO Michel Bon estimates that operating cost savings should reach US$300 m ([epsilon]330 m) per year by the third full year after the merger, and duplicated capital expenditure should be reduced by about US$75 m([epsilon]82.5 m) per year.

But there are still doubts in the investment community about how soon Equant can turn the corner and begin to make profits. "They [France Telecom] are paying a bit much," said Nigel Hawkins, an analyst with Williams de Broe. "There are still some questions as to the extent of how much Equant is worth, and also some concerns with Global One. France Telecom has made some fairly robust targets for the business, and some people are not actually convinced these will be seen. I'll need a lot of convincing that Global One will turn the corner as they say."