AT&T Canada restructuring hailed as positive move to keep competition alive

Last week’s announcement that AT&T Canada has successfully negotiated a new deal with its bondholders and that it will operate under the Companies’ Creditors Arrangement Act (CCAA) while it restructures is being heralded as the best chance for the CLEC to survive (NL Update, Oct. 15/02). Observers inside and outside of the negotiations like what they see. "It was a very complex deal only because of all of the different stakeholders here and also given the fact that this is a regulated Canadian telecom which had restrictions on foreign ownership," Chris Snow of the bondholders’ law firm Bingham McCutchen explains to Network Letter. "So there were a lot of details we had to work out. Most of the bondholders are Americans and there’s restrictions on foreign ownership of telecom so we had to come up with ways how we could accommodate the restructuring in light of the fact that a lot of the bondholders are American." The deal will see the issuing of limited voting shares and of common shares. The new arrangement will need regulatory approval from the CRTC and Industry Canada. The talks for a new bargain had been going on for several months. Snow says the shareholders entered the new agreement knowing how things have changed in recent years. "I think the bondholders understand that it’s a very difficult telecom market out there," he states. "The company was highly leveraged and it wouldn’t be able to satisfy its debt obligations going forward. So they understand there was a restructuring that was needed." As a result, the bondholders will get $200 million and between 93 and 100 per cent of the reconfigured corporation. AT&T Corp. of the United States, which still has commercial ties with its Canadian cousin, could stand to hold seven per cent of AT&T Canada. In return, $4.5 billion of the CLEC’s outstanding public debt is eliminated. A filing by AT&T Canada to the Securities and Exchange Commission in Washington outlines some of the ties between the American and the Canadian firms. "AT&T Corp. currently generates and/or influences up to $300 million of the company’s revenues on an annual basis and provides the AT&T brand on a royalty cash-free basis," AT&T Canada writes. "Accordingly, a significant change in the arrangements with AT&T Corp. could have a material impact on the projections." A longtime analyst of the Canadian telecom scene is heartened by the news. It bodes well not only for one particular telco but for the entire level of competition in this country. "They’ve given and injected new life into this company, which we can point out has had a couple of other lives before. It’s like a cat with nine lives," Lawrence Surtees, director of telecom research for IDC Canada, tells Network Letter. "And we can put aside AT&T Canada, its name or how it competes or whether its strategy going forward is the right one. This is an important move for the state of competition in the sector in Canada, because the more players that can compete, the better things are going to be for consumers, whether they’re business users or you and me." In its SEC filing, AT&T estimates the Canadian business LD market will fall from $3.1 billion in 2001 to $2.4 billion by 2006. It projects an increase in business local revenues, although it does not provide estimates. "The company also assumed that as a result of the financial difficulties currently experienced by Canadian carriers, competitive choices are expected to decrease, thereby slowing the rate of price erosion in the voice services market. The company also estimated that the Canadian business data and Internet market will increase from $6.4 billion in 2001 to $8.2 billion in 2006." It predicts an average growth rate over the next five years of five per cent in the data/Internet sector, which brings in higher margins than the voice market. AT&T Canada believes its LD revenues will fall by six per cent during the same period, until they make up less than 28 per cent of the company’s revenues by 2007. Local revenues are projected to fall marginally over the next half decade. Surtees endorses the idea that a price war is not forthcoming. Such a move could hurt all players, be they ILECs or CLECs. The analyst calls upon Darwin to explain the landscape of the telecom industry, while at the same time taking shots at failed American telecoms like Global Crossing and WorldCom. "If left to natural selection, they’d be gone. There’s a view that screwing around with evolution is a dangerous thing," he opines. "So taking that analogy to the telecom space, we resurrect through restructuring and bankruptcy protection guys like Double Crossing, WorldCon and 360 and GT Group Telecom and AT&T Canada. We’re interfering with corporate natural selection." AT&T Canada points out in its SEC submission that it has managed to keep its capital expenditure costs down. While it spent over $400 million last year, its future outlays will be in $140-160 million range. Surtees credits that to the telco having completed its rollout of new facilities when the markets were still up. "Fortunately for them, just before the crapola hit the fan, when the downturn really started, they had just finished their major three-year expansion project, which had them close to the billion dollar mark," he says. "In terms of the long term, thank God they had the money and they did it before it got real ugly and they were left with half of it done and having to raise the money when you can’t raise it." The analyst, who does an annual study on capex spending in this country, notes that ILECs account for the major portion of capital spending in Canada. In the United States, the incumbents and the competitors spend amounts that are more closely aligned. Surtees jokes that AT&T Canada’s spending in the Canadian market amounts to "not much more than a rounding error." Industry Canada minister Allan Rock has been hinting that changes may be made to the foreign ownership restrictions in the telecommunications and media sectors. This would be in line with recommendations made last year by the National Broadband Task Force (NL, June 18/01). It has long been surmised that the CLECs have been lobbying the federal government to loosen those limits.

AT&T Canada restructuring hailed as positive move to keep competition alive

News | October 21, 2002

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