360networks proposes risky purchase of Group Telecom



On November 20, 2002, 360networks announced plans to acquire GT Group Telecom for $260.5 million in cash. The deal belongs to a court-approved plan that will enable GT to emerge from creditor protection. The deal will likely close in early January 2003.

First Take

Gartner believes that 360networks will take on too much, too soon and that the deal could threaten the financial viability of both companies. 360networks emerged from creditor protection itself only on November 12, 2002 – just a week before announcing this planned acquisition. A tough economy and a telecom market that likely won’t recover until 2004 already challenges established companies. 360networks will have even more difficulty trying to re-establish itself after creditor protection. Although the situation won’t become clear until the companies explain the deal in greater detail, 360networks seems headed for doubling its burden:

– The deal will doubtless use up some of the US$100 million in cash 360networks has as well as GT’s cash.

– Keeping 360networks’ and GT’s operations going will require spending still more cash.

– Integrating the two companies will compound the marketing and management burden of restoring 360networks’ credibility in the market following the restructuring under creditor protection.

We believe these challenges far outweigh the deal’s benefits:

– 360networks probably will acquire GT’s network and other assets for pennies on the dollar.

– The deal will give 360networks, which has had no last-mile infrastructure, several metropolitan networks.

– 360networks will pick up GT’s wholesale business, which accounted for a significant portion of its revenue – for example, GT sold network capacity in the west to Bell Canada and in the east to Telus.

Gartner is very concerned. 360networks’ plans for GT remain unclear – will GT continue to target primarily small and midsize businesses or move up market? 360networks could potentially wind down the enterprise business and keep the wholesale business. We recommend signing no new contracts or additional contracts with either carrier until the implications of this deal become publicly known. Although enterprises should not run from these providers (yet), we do recommend preparing back-up plans for services with either of these providers.

Analytical Sources: Bob Hafner and Elroy Jopling, Gartner Research

Recommended Reading and Related Research

“Are You at Risk if an NSP Files for Bankruptcy Protection?” – Enterprises should treat what is happening in the NSP industry as a potential threat to their business continuity. By Jay Pultz and David Neil

“Group Telecom Customers Should Prepare to Take Action” – Enterprises should take immediate steps to protect themselves because GT faces significant financial challenges. By Bob Hafner

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