360networks snaps up Group Telecom

Group Telecom Inc. (GT) and 360networks Corp. are making plans to marry, but one industry analyst is skeptical about the combined force’s chances for success.

The two Canadian telecommunications companies on Monday announced they would join up in their bid for significant market share. 360, a Vancouver-based wholesale service provider, said it would acquire GT for an undisclosed sum. GT, headquartered in Toronto, offers voice and data connections for businesses.

In a statement, Greg Maffei, 360’s CEO, said together the firms would comprise “Canada’s largest and most complete full-service competitive telecommunications company.”

Dan Milliard, GT’s CEO, said in a statement that the agreement “will achieve the best possible result for our customers, employees and creditors. The transaction will allow customers to continue to receive leading high-quality, reliable telecommunications services. The combination will allow the highest number of our employees to remain with a growing company.”

Warren Chaisatien, an analyst with IDC Canada Ltd. in Toronto, said the acquisition is important on two fronts. For one, it suggests that 360 is moving away from the wholesale market and towards the service provider arena, where it will compete with Bell Canada, its affiliates and Telus Corp.

As well, Chaisatien said the move affirms a suspicion he had about Canada’s telecommunications industry: that certain players would come together and put up a unified front to compete against incumbent service providers.

But will the acquisition yield success for 360 and GT? Chaisatien seemed doubtful. On one hand, the firms might find strength in numbers, but on the other they might find the path to profits blocked by competitive forces.

Regarding 360’s transition away from wholesale, “I don’t know if that’s a good move,” Chaisatien said. Acknowledging that the wholesale market has not been kind to companies, 360 runs the risk of annoying the incumbents Bell and Telus – 800-pound gorillas that might fight back with prices low enough to set 360 off balance.

“GT is in no great shape either,” Chaisatien pointed out, referencing that firm’s problems with creditors. GT sought court protection from its lenders this summer, citing a turbulent market for its woes.

Still, “there is a ray of hope,” the analyst said. Although 360 is moving towards the incumbent-owned service provider space, that market has proven more profitable than the wholesale space, Chaisatien said.

As well, “I would hope the merged management teams would be able to turn things around,” he said, adding that both GT and 360 have pulled through to this point and might have the wherewithal to create a viable business together.

360 in October announced that a U.S. Bankruptcy Court confirmed its plan for re-organization, paving a way out of bankruptcy protection. The firm in September won approval for its restructuring plan from the Supreme Court in B.C. 360 filed for protection in June 2001. Since then it has lit its Canada and U.S. footprint and amassed $100 million, enough that the company need not seek further funding for five years, it said in a statement.

GT in November said it had received an extension on its creditor protection until December.

The two companies entered a seven-day negotiating agreement the week of Nov. 15. Monday’s news is the result of the closed discussions they had during that timeframe. The acquisition is subject to court and regulatory approval before it’s finalized. In a joint statement GT and 360 said they expect to wrap things up by Feb. 13, 2003.