Merger Creates Wholesale Voice Giant

Posted: 12/2003

Merger Creates Wholesale Voice Giant
By Josh Long

Teleglobe International Holdings Ltd. says it plans to acquire ITXC Corp. in a stock agreement, creating what Teleglobe President and Chief Executive Liam Strong claims will be the largest wholesale voice carrier in the world.

That claim is plausible, says Stephan Beckert, research director with Telegeography, noting MCI and AT&T Corp. route the most voice traffic around the world, but the two phone giants do not publicly disclose how many wholesale minutes they route nor do they like talking about the business. However, analysts say wholesale is increasingly representing a greater portion of their overall voice traffic.

I do know WorldCom and AT&T would be giving them [ITXC and Teleglobe] a run for their money, says Nancy Bedard, an analyst with The Yankee Group.

Executives of ITXC and Teleglobe say the combined Teleglobe will have the scale to provide telecommunications providers better rates and forge partnerships with local phone companies deeper into developing countries such as Columbia through ITXCs VoIP network.

Does this mean the industry is on the brink of another price war?

On the voice side prices already are so low there is not much room for price wars unless companies are going to start selling at a loss, says Bedard. I think the mergers if anything should help stabilize the prices.

Executives of ITXC and Teleglobe say the combined company would be profitable by the end of next year on about $1.15 billion in annual sales based on third-quarter figures and anticipated cost savings and other efficiencies realized through the merger.

The companies expect the merger to close in March 2004. Under the agreement terms, ITXC shareholders would own 28 percent of the new Teleglobe. Common shares would be listed on the Nasdaq National Market, though executives said there would be no initial public offering.

New York firm Cerberus Capital Management L.P., a majority stakeholder in Teleglobe, would own a 64 percent stake in the new company; Teleglobe management would control an 8 percent interest.

Strong, who will manage the new Teleglobe as president and chief executive, says Teleglobe always has operated a profitable wholesale business; its foray into the retail and enterprise markets got the company into trouble in the late 1990s, he says.

The ITXC merger agreement marks a rapid turnaround for Teleglobe. In May 2002, Teleglobe filed for bankruptcy court protection after its parent company, BCE Inc., withdrew long-term funding. Earlier this year, the affiliates of New York-based Cerberus and Philadelphia-based TenX Capital Partners LLC purchased Teleglobes core assets for $125 million.

Teleglobe, of Montreal, operates a network linked to about 275 fixed-line operators and 360 mobile providers. In addition to its traditional voice business, the company sells other higher-margin wholesale services to telecommunications providers, including mobile roaming and IP transit.

The ITXC acquisition would give Teleglobe a big presence in the VoIP market. Since it was founded in 1997, ITXC has grown at a staggering rate, linking its VoIP network to developing countries around the world to transport billions of minutes of calls on behalf of other phone companies. However, the Princeton, N.J., company has still been losing money, posting a third-quarter net loss of $9.9 million on $74.6 million in revenue. In the third quarter, ITXCs revenue shrunk sequentially as the company distanced itself from wholesale customers it considered uncreditworthy. We didnt perform as well as I would have liked us to, ITXC chairman and CEO Tom Evslin said in a third-quarter earnings call the same day the merger agreement was announced. We have been transitioning our customer base and we skipped a beat in doing that.

Evslin says ITXC observed some positive signs in the beginning of the fourth quarter. For example, ITXC generated traffic through a significantly different customer mix representing companies with lower credit risks, he says. One Sunday in October, ITXC carried a record 17-plus million minutes. Traffic really has come back, Evslin says.

Phone companies handing off calls to ITXC increasingly are using VoIP technology in their local networks, abolishing the related costs to translate the call from one format to another, the chief executive says. However, millions of calls are still terminated over a traditional phone network and must be translated from Internet protocol to TDM (time division multiplex).

In March, Evslin announced plans to retire. The following month, IDT Corp. made an offer to buy ITXC shares in what Evslin considered a hostile  and undervalued  takeover bid. Upon completion of the Teleglobe merger, Evslin will become non-executive chairman of the board of directors of the combined company.