Analysts Laud British Telecoms Pursuit of Infonet

By Ian Betteridge  |  Posted 2004-11-10

Analysts Laud British Telecoms Pursuit of Infonet

News that British Telecom is buying Infonet Services Corp. in a deal worth some $965 million is raising eyebrows around the industry. The deal, BTs first foray into major acquisitions in many years, looks set to shake up the market for global communications at a time when it seemed that it had entered something akin to a quiet phase.

Analyst reaction to the deal has been overwhelmingly positive. The deal would be "very good for BT, with few potential downsides," said Julian Hewitt, chief analyst at London-based Ovum, "The deal looks sensibly priced, with enterprise value just under one times revenues."

The plus points for BT are many. According to Hewitt, "Neither BT nor Infonet has adequate scale as a genuinely global networking player. Together, they should have sufficient scale to generate a profit, and for synergy to kick in. Were pleased to see that BT is boosting an area of its core networking competence, rather than taking the more risky option of [say] the international IT services market."

"The acquisition of Infonet gives BT scale to complement its existing global business," said Jill Finger Gibson, IDCs research manager for the European telecommunications services market. "We dont see any widespread negative effect on customers." And the addition of Infonet is likely to give BTs competitors in Europe, such as Telecom Italia and Telefonica, headaches. "Infonet [delivers] a substantial Latin American business," she said. "Latin America is a key growth area for southern European PTTs, and they will need to watch BTs moves in the region more closely."

The chief concern over the deal for some is likely to center on BTs history of attempts to expand beyond its core European market and into the United States, the Far East and elsewhere. The 1990s saw BT buy a string of foreign telecom companies in an attempt to gain footholds around the world, deals that now look overpriced thanks to the inflated prices prevalent in the communications market during the dot-com boom years.

Most notable of all is BTs 1996 attempt at buying MCI, which, despite gaining regulatory approval from both the U.S. Department of Justice and the European Unions Competition Commission, foundered after a rival bid emerged for the company from WorldCom Inc. That deal ended with BT selling its 20 percent stake in MCI to WorldCom for $7 billion, something that commentators at the time widely described as a bloody nose for BT, despite the $2 billion profit the company made from sales of the shares.

Next Page: Late bid for Infonet "unlikely."

Page 2

However, in the case of Infonet, although there is potential for other global telecom players to make a late bid for the company, Hewitt described this prospect as "unlikely. Certainly all the other global networking players would find Infonet attractive, but none of them stands out as ready to jump into the bidding."

And, unlike the MCI deal, the acquisition of Infonet is clearly not just about gaining a foothold in the lucrative U.S. market. According to IDC, only 20 percent of Infonets revenues come from the United States, and its customer networks are among the most multinational in the industry.

Ultimately, although the deal looks like an excellent match, much will depend on how the integration of the two companies is executed over the coming years. BT has estimated it will take between 18 months and two years to integrate the operations of the two companies, and both companies have taken great pains to point out that they have no intention of rushing this integration.

BT is not without experience in this area, having already reintegrated BT Ignite and Concert. If the two companies can manage this transition period well, it will likely mean that BT will gain a stronger position in the market without causing any pain to existing customers.

Check out eWEEK.coms for the latest news, views and analysis on voice over IP and telephony.

Rocket Fuel