C&W joins top league with pounds 380m MCI deal
Friday 29 May 1998
The acquisition catapults C&W into the top five providers of Internet capacity in the United States and gives it exposure to one of the fastest- growing parts of the telecommunications industry.
C&W is buying MCI's "backbone" - the physical infrastructure over which Internet traffic runs - as well as a customer base of 1,300 service companies which use MCI to connect their customers to the Internet.
Dick Brown, C&W's chief executive, hailed the deal as a "huge leap" for the group. "This gives us the scale and scope that is necessary in this business," he said.
MCI put the division up for sale after regulators in the US and Europe threatened to block its merger with WorldCom, the US giant.
Although figures vary, some experts estimate that the two companies control up to 60 per cent of the Internet traffic in the US. Regulators on both sides of the Atlantic still formally have to clear the acquisition, as well as the WorldCom-MCI merger, for the deal to go ahead. But Mr Brown said he had already made met both regulators to argue C&W's case.
Analysts praised the move and the keen price that Mr Brown had managed to negotiate. The price is less than three times the division's projected revenues for the coming year, which are likely to be about $220m. Similar businesses in the US have been sold for much higher multiples.
"One thing is for sure, and that's that C&W are not overpaying," one observer commented. However, C&W's share price slipped 4p to 675p due to worries over weak markets in Asia.
It is understood that MCI offered the backbone business to five other telecom companies, including British Telecom, at the same time as it spoke to C&W.
However, the C&W team gained an advantage by moving faster than its competitors. Mr Brown said that the entire negotiating process took just 18 days.
Internet traffic is one of the fastest-growing areas of the telecoms industry. Industry analysts expect the market in the US, which is expanding at rates of up to 100 per cent a year, to more than treble in value to $16bn by 2000.
This is partly because more people are surfing the World Wide Web and sending e-mail. However, the real growth potential is in moving other forms of telephony - including data communications, fax traffic and ultimately voice telephony - on to the Internet.
This can be done by sophisticated Internet technology which divides data and voice messages into small packages before sending them, allowing the system to handle much more traffic.
Mr Brown said the challenge for C&W was to migrate existing voice and data traffic from its existing network on to the MCI backbone, allowing it to cut its prices.
"It is a very strategic deal because it will allow us to migrate traditional circuit switched business traffic off the standard networks and on to our higher bandwidth networks at discounts," he explained.
C&W already has substantial Internet operations through its various businesses in the UK, Australia and the Caribbean. However, it did not have a major presence in the US. "We couldn't build this," Mr Brown said. "We had to buy it."
Under the agreement with MCI, C&W will carry some of the US group's traffic for a two-year period while it sets up an alternative network. However, analysts said that the revenues amounted to just a fifth of the division's total revenues, which C&W would not find it hard to replace.
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