The $330-million acquisition of Call-Net Enterprises will give Rogers Communications extensive network assets in Eastern Canada and a large base of customers for its forthcoming local residential
phone service, analysts said Wednesday.
Rogers, which most recently purchased the assets of Microcell Communications, said the board of directors of both companies have approved the transaction, which is expected to close in July. Call-Net, which provides home phone and local business service, operates a Sprint subsidiary in Canada and owns a 14,000-km fibre optic network. It employs approximately 18,000 people.
President and CEO Ted Rogers said the company’s management will consult with partners to determine what technologies it will use to serve the Call-Net customer base, a choice that includes cable, reselling through Bell or Telus’s network, its Inukshuk partnership or the assets from 360 Networks Call-Net acquired earlier this year.
“”This is not – not – a change in our plans for advanced voice,” he said. “If anything, this will accelerate those plans.”
Call-Net was among many competitive local exchange carriers (CLECs) that had hoped to grow its business following the Canadian Radio-television and Telecommunications Commission’s (CRTC) efforts to loosen regulations and encourage competition against incumbents like Bell and Telus. While many other CLECs went bankrupt, Call-Net hung on. Its management was criticized for failing to introduce new services and improperly marketing its long-distance plans, moves that eventually cost the company upwards of $191 million in losses during the six months that ended June 1999. Call-Net went looking for a buyer in 2000, only to take itself off the auction block a few months later and introduce management changes.
In 2002, an Ontario Superior Court of Justice approved a plan whereby Call-Net would issue new stock and bonds of much lower face value to its bondholders — effectively giving them an equity stake in the company instead of paying them cash. The plan, reduced the company’s long-term debt by over $2 billion.
Call-Net’s turnaround efforts were stymied, however, by a CRTC ruling to reduce the five-year-old price cap that CLECs pay incumbents for use of their networks. At the time, Linton said the reductions weren’t enough and as a result, Call-Net went through another round of restructuring, slowing down its residential ADSL rollout and putting off extending its local phone service to Quebec.
“Call-Net’s ongoing problem is that while they got their finances in order, they were pretty much always gong to be a second-tier player no matter what happened,” said Ian Angus, principal at research firm Angus Telemanagement. “The major competition in residential phone service is going to come from the cable industry.”
Gartner Inc. Canada analyst Elroy Jopling said the acquisition will bring Rogers an established sales force with considerable expertise in working with the small and medium business sector.
“They end up with an engine that’s already running to get into that market,” he said. “From a technology perspective, what they seem to say they will do is to pick the best technology as they go along.”
Brian Sharwood, an analyst with the SeaBoard Group in Toronto, said the acquisition could bring Rogers more clout among business customers, even though Call-Net has been somewhat behind in executing deals.
“They may do well having someone to kick them around with a little more vigor, which Ted Rogers is known for doing,” he said. “Immediately Rogers can offer them more services integrating wireless, different forms of access, cheaper ways to wire their businesses.”
Earlier this year, Rogers bought out AT&T’s 34 per cent stake in its wireless operation, and Ted Rogers said the company will soon meet with Sprint to discuss how its relationship with the Canadian subsidiary will move forward, though he expressed a preference for rebranding the operation Rogers so that it is consistent from coast to coast.
“It was as though they hadn’t talked to Sprint already,” said Jopling, adding that Sprint is already preoccupied with its merger with Nextel in the United States. “The $20 million it gets from Rogers and Call-Net isn’t that big a deal.”
Rogers praised Call-Net chief executive Bill Linton, a former Rogers employee, for being a catalyst for change with the CRTC. Now that Call-Net is part of Rogers, however, the combined company may need to rethink its policies towards regulators, said Jopling.
“It’s like the situation with MTS before they acquired Allstream. They had the incumbent mentality and had to change (direction) in mid-stream,” he said. “Do not be surprised if Rogers has to do something similar.”
“Ted and Bill have often been on the same page in opposing anything that Bell does. I don’t think they’ll be in disagreement,” said Sharwood. “The problem is when you’re the third-largest telecommunications company in Canada, you’re not the little guy anymore, so it’s hard to make the same arguments.”
Rogers said the timing of the acquisition would not get in the way of its future product or service rollouts.
“It is the progress we have already made with the Microcell integration and in preparing to launch our local telephony deployment – both or which are and will remain our top, near-term priorities on the wireless and cable divisions – that it’s possible to act on this opportunity now,” he said. “In fact, the majority of the Microcell integration activities are scheduled to be complete before we begin any integration efforts with the Call-Net business.”
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