Call-Net saga far from over

The future of Call-Net Enterprises Inc., which has been clouded since Crescendo Partners LP, a dissident shareholder, began wooing shareholders to support Crescendo’s plans to sell Call-Net in August, was still up in the air at press time.

Last month, following an angry exchange of words in the media between Crescendo president Eric Rosenfeld and Call-Net president and CEO Juri Koor, Koor and Call-Net chief financial officer Vincent Salvati suddenly resigned clearing the way for a change in Call-Net’s board and management, and Crescendo’s plans to sell the company.

Call-Net holds the Sprint brand in Canada.

Rosenfeld claims ten potential buyers have expressed interest in Call-Net’s assets, but only one company, BCT-Telus has made any public overtures.

Industry analysts argue selling off Call-Net and its assets is a lot easier said than done.

“Show me the buyers,” challenges Dvai Ghose, a telecommunications analyst with CIBC World Markets. “This isn’t a particularly valuable asset. If it was it wouldn’t have diminished so much in value in the market.”

“The main problem is that they’re entering into new markets, such as a local market, without any facilities of their own and without any access to capital. They’ve plans… to build their facilities, but unfortunately they don’t have access to cash to build the facilities,” Ghose said.

Telecommunications analyst Ian Angus, of Angus Telemanagement Group, agrees that the $2.2-billion of debt Call-Net has accumulated may deter potential buyers.

“One of the big drawbacks, of course is $2-billion in debt. One might hope that somebody could use [the debt] for some reason or the other. [The debt’s] going to be the biggest problem both in the sense of does anybody want to buy [Call-Net], or if you have to pay off the debt when you sell the company, does all the money you get from selling the company end up paying off the debt and the shareholders don’t get anything. I don’t think its going to be an easy sell as a result.”

Iain Grant, telecommunications analyst with the Yankee Group in Canada, believes many analysts underestimate Call-Net’s potential. For example, Grant suggests that any company taking over Call-Net can sell its US network of 125,000 miles of fibre strand(estimated at $287.5-million), to pay off the company’s debt.

Call-Net could also sell its customer subscriber base to another company such as Primus to raise capital, adds Grant. Primus has already bought AT&T Canada’s subscriber base, of 450,000 residential subscribers.

“The company for whom [purchasing Call-Net] makes the best, biggest potential impact is BCT-Telus, who are saying, ‘Yes, we’re going to be in central Canada; yes, we’re going to be in eastern Canada hurry up and wait the year-and-a-half.’ This [purchase of Call-Net] brings them up a year-and-a-half forward in their business plan, in fact not only a

year-and-a-half forward, but probably brings the business plan forward two or three years,” insists Grant.

On October 9, BCT-Telus indicated in a letter to the Call-Net board that they were interested “in pursuing discussions on the acquisition of all or part of Call-Net.” Telus offered to hold discussions with Call-Net following the shareholders’ meeting, last month [as of press deadline, the shareholders’ meeting had been rescheduled to October 26 at 10:00 am].

However, both Angus and Ghose question whether Telus would be interested in purchasing all of Call-Net’s assets. Ghose points out that Telus is currently building its own 48-strand fibre network in Canada at a cost of $210-million.

“The big thing for them would be [that] it would short-circuit some of the process they’ve already started with. On the other hand, they’ve already committed to build their own fibre network and they’d end up owing an awful lot of money to pay off Ledcor [whose subsidiary Worldwide Fibre is constructing the network],” says Angus.

Grant disagrees with Ghose and Angus’s suggestion that Telus cannot get out of their contract with Ledcor.

“Give me a break. Any construction contract written by anybody, anywhere has an out clause. There are ways of getting out of contracts. That’s why you have lawyers.”

Another possible buyer could be MCI WorldCom which purchased US Sprint for US$130-billion last month.

But Ghose says current Canadian ownership regulations make MCI control of call-Net difficult and costly.

For example, AT&T owns 31 per cent of AT&T Canada and AT&T has said it will buy the remaining 69 per cent from AT&T Canada investors at a minimum of $75 per share when foreign ownership restrictions are lifted. If restrictions are not removed by June 30, 2000, shareholders will accrue 16 per cent every year on the floor price of $75. Therefore in June 30, 2001 a shareholder will get $75 plus 16 per cent annually.

Ghose and Angus maintain that key assets of Call-Net will be sold off rather than the company being sold as a whole. Call-Net’s key assets are its Canadian fibre network; the US network; shares in MicroCell, distributors of Fido, which are rumoured to have been already sold; and 1.2 million customers.

“I think that there may be more value in breaking up this company then continuing the long painful death of this company,” says Ghose.

Grant argues that Call-Net’s “shareholders would be best served if they sell it as a going concern.”

All three analysts agree that one of Call-Net’s strengths lies in its partnership with Sprint. Sprint US owns 25 per cent of Call-Net, and marketing of the Sprint Canada brand name.

“Obviously, a big question for anybody that is considering buying them for their position in the Canadian market is going to be what about the Sprint brand name. For example, if BCT-Telus bought it I think it’s very likely that Sprint US would simply say, ‘Well you can’t use our brand name anymore,’ because BCT-Telus is 26 per cent owned by GTE. which is a major competitor of Sprint,” Angus said.