CLEC stops connecting

The failure of Oakville, Ont.-based telecommunications provider Cannect Communications, which went into receivership early this month, is likely just the first in a line of CLECs to fall over the next two years, suggest analysts.

“What you’re seeing…really started at the end of last summer,” said Johanne Lemay, co-president of research institute Lemay-Yates Association in Montreal. “New entrants in telecom have tremendous difficulty in getting financing, and that’s been going on for six to seven months.

“Over this year and 2001, many of these (CLECs) will run out of cash. That obviously leads to consolidation, or it could also lead to a fire sale of the assets.”

Running out of cash is exactly what happened to Cannect, which prided itself on its service-oriented and less-aggressive approach to attracting customers. Reports indicate the company tried unsuccessfully for an initial public offering and a merger with Toronto-based competitor Axxent Inc. last fall, but both attempts failed. The company’s last major round of financing took place last March when it received $33 million in a private placement organized by Research Capital Corp.

Telecommunications analyst Mark Quigley of Brockville, Ont.’s The Yankee Group in Canada, said Cannect was simply a victim of a tightened investment market.

“Apparently there weren’t that many investors out there interested in investing in competitive local exchange carriers in Canada,” Quigley said.

Cannect’s president and CEO, George Horhota, spoke with Network World Canada only days before the company went under. He talked about the company’s sales approach and its reasons for limiting itself to going after specific vertical-market customers in only five cities: Vancouver, Calgary, Toronto, Ottawa and Oakville.

“Our whole approach has been to earn a relationship of trust, and then (earn customers’) business over time,” he said. “We don’t expect to earn all of the business over time. In fact, we don’t expect to earn most of it.”

Quigley did not see Cannect’s receivership as a failure of its “boutique” approach.

“I don’t know it it’s necessarily fair to attribute a company’s success to the way the financial markets react to that company,” he explained. “But I do think the Canadian marketplace has gotten to a point where it’s all about cashflow, and that means you may have to be a little more aggressive to ensure you have enough cashflow to continue operations.”

Quigley said the cashflow generated by Cannect’s 2,300 customers (along with what Horhota said was an average amount of 1.9 products each customer purchases) might make the company attractive to other CLECs or Telus, which is trying to establish a foothold in Eastern Canada.

Interim receiver Ernst & Young, which has told customers it has groups of four people maintaining Cannect’s network operations, has indicated it plans to sell the company, or portions of it.

However, with two-thirds of Cannect’s revenues generated through local and long-distance voice traffic, the company may face hesitancy from other operators.

“The more you slant your customer mix toward the data and Internet side of the equation, the more attractive (you) would prove to be to any potential suitor,” Quigley said, citing the poor margins in voice services.

Cannect’s customers appear to be patiently awaiting the end result.

“We’ve been contacted by them and (told) to just stay put for the time being,” said Douglas Brazier, the vice-president of finance for Q1 Technologies in Vancouver. “We’ll just have to wait and see; we’re not going to jump off the wagon right now.”

Ernst & Young has laid off 75 per cent of Cannect’s workforce and is maintaining only customer service at this point in time. The three-year-old Cannect provides services to mainly small companies with an average of 40-50 employees.

Ernst & Young did not say what would happen to Markham, Ont.-telephone equipment maker Delphi Solutions, which Cannect purchased at the end of last year