Canadian companies grow networks, expand holdings

The expansion of fibre networks and related business offerings in Canada is not a mad rush, said an industry analyst, but a logical evolution.

Iain Grant, an analyst with the Yankee Group of Canada in Belleville, Ont., said recent purchases by MetroNet Communications Corp. are indicative of a long-term strategy, not just a grab for what is conveniently available.

“MetroNet has enormous ambitions,” Grant said. “They want to become the largest alternate telecommunications company operating across Canada. That ambition is a significant one and they cannot afford to slow down any time soon.”

Bruce Mann, vice-president of investor relations for MetroNet in Toronto, said calling MetroNet ambitious is an understatement.

“You can either watch things pass you by or you can do things that create a lot of value,” Mann said.

He said the recent acquisition of controlling interest in Internet service provider Netcom Canada as well as an asset buy-out of bankrupt Starcom Service Corp. in Orem, Utah, were largely a story of being in the right place at the right time for opportunities that just happened to fit MetroNet’s growth strategy.

“We’d been talking to [Starcom] for about eight months, and we had a different perception of what they were worth than they did, so we just waited until we ran into them in bankruptcy court,” Mann said.

The purchase price was approximately $24 million for 48 fibre optic strands along a more than 300 kilometre route connecting Vancouver with Seattle.

“The Starcom option came along at a very good time, essentially giving them 25-cents-on-the-dollar access to resources and facilities,” Yankee Group’s Grant said.

What surprised Grant was that MetroNet then turned around and announced three 20-year indefeasible rights of use (IRUs): PSINet Ltd. will have 20 of the strands, and Teleglobe Communications Corp. and BC Telecom Inc. will each have two strands, leaving MetroNet with 24. Grant said he was surprised because he did not think MetroNet needed the money.

But MetroNet’s Mann said it wasn’t an issue of needing the money so much as not needing the extra fibre at this point. He said MetroNet in 20 years will be able to take that capacity back.

“Twelve would have probably been good for us because we’re 12 strands everywhere else across the country…Anything above 12 strands to us is gravy,” Mann said.

“Essentially, we’ve sold a long-term lease on those other 24 fibres and that capacity is now dedicated to the people who paid for that…We will get from those companies maintenance and support fees on an annual basis for our maintaining the network. Well, the neat thing is we have to maintain the network anyway for our own use. The cash flow we get from those companies significantly reduces what we paid for that asset, so it worked out really well,” Mann said.

Bryan Boyd, vice-president of PSINet in Toronto, was happy with his end of the deal as well because it fit in with PSINet’s own growth strategy.

“This strategy we have to do this build-out long predates the availability of (Starcom going bankrupt). It was an opportunity that presented itself and we took advantage of it…It doesn’t make sense to build when you can buy it. And it’s faster too. Obviously, it takes time to dig the trenches and so forth,” Boyd said.

He said over the past 18 months, PSINet has bought more than 12,000 miles of fibre in the United States and about the same in Europe, a fibre route through India to connect Asia to Europe, as well as fibre routes under both the Atlantic and Pacific oceans.

“This is just another piece in that network,” Boyd said. “Our plan is to continue to acquire the fibre and other capabilities to continue to grow this network.”

However, Boyd said the IRU of 20 strands on the west coast will take care of that area for a long time. He explained that a pair of fibre strands can run multi-gigabits per second of traffic.

“A normal customer connection would be 1.544Mbps, so you’re talking hundreds of thousands of customer connections over one pair, and we have ten pairs,” Boyd said.

As for MetroNet’s acquisition of 51 per cent of Netcom Canada’s stock — the rest is held by Providence Equity Partners out of Providence, R.I. – Yankee Group’s Grant said the $20.5-million-cash and $5-million-stock deal was another example of “evolution of business as usual.

“They have been buying smaller ISPs and building up their competency in that area. Although people talk about MetroNet as being an alternative services provider whose speciality will be local telephone service, looking at their business plan, they expect to make most of their money from Internet products,” Grant said.

The difference with Netcom Canada, Grant said, is the size and scope.

“Netcom had a much larger presence than MetroNet did in corporate Canada’s ISP shops. They were probably second or third to Sympatico and UUNET. That certainly gives MetroNet a presence they didn’t have before,” Grant said.

MetroNet’s Mann said his company didn’t have any dial-up business before this acquisition.

“We also did not have some of the value-added service features to really round out an ISP portfolio, and by that I mean things like Web hosting. Netcom brought all that,” Mann said.

“It was a very good value. It wasn’t exactly a fire sale (as with Starcom), but we were at the right place at the right time.”

Mann said MetroNet respects Netcom’s current business practices and will leave the entire company intact, including the name. He said the only planned change thus far is that sales teams from both Netcom and MetroNet will have an expanded portfolio.

“Netcom Canada is doing a great job of doing what they do. Maybe we can learn a few things from them. We’re not planning on messing it up,” Mann said.