Business

The birth of a new giant

Two western companies join forces to compete with Beil

JENNIFER HUNTER November 2 1998
Business

The birth of a new giant

Two western companies join forces to compete with Beil

JENNIFER HUNTER November 2 1998

The birth of a new giant

Business

JENNIFER HUNTER

George Petty is a plain-speaking guy, not prone to superlatives. So when he told Telus Corp. shareholders last April that he wanted to turn the Alberta telecommunications company into one of the world’s “premier communications” firms, he was not bluffing. Petty’s determination to transform Telus from a company that only eight years ago was provincially owned into a national contender was apparent earlier this year when he tried to ink a deal with Halifax-based AT&T Canada Long Distance Services Corp. When that merger foundered in April, the calculating and obstinate Petty, Telus’s president and chief executive officer, refused to retreat. By July, he was deep in talks with BC Telecom Inc., controlled by GTE Corp of Stamford, Conn., the third-largest local telephone company in the United States. And last week, the two companies announced a merger that will permanently change the landscape of the roughly $22-billion Canadian telecommunications industry. Together, says Brian Canfield, the company’s new chairman, ‘We can take on anybody.” Telecom experts say the merger will erase the vestiges of once-inviolable provincial boundaries that kept phone companies on their own turf. “The earth is moving,” says Eric Manning, a University of Victoria professor who researches communications networks. ‘The monopolies held by telephone companies are now biting the dust.” The merger will create a powerhouse with almost $6 billion in revenues and $8.2 billion in assets, a company with 22 per cent of the national market, second only to Bell Canada, owned by BCE Inc., with 42 per cent of the industry. “We’re going to build an unbeatable company focused on growth,” Petty said last week. “The opportunities are huge.”

In fact, most of those opportunities will lead the new entity—to be called BCTTelus—east into the rich Bell Canada territories of southern Ontario and Quebec. “Clearly,” BC Tel president Don Calder told Maclean’s, “we are going to compete with Bell Canada.” The journey east of the Alberta border comes via Ledcor Industries Ltd. of Vancou„ ver, which is building fibre optics networks across Canada. BCT.Telus has struck a deal with Ledcor that will enable it §? to provide data services to lucrative business accounts in | Montreal, Toronto and other cities in eastern Canada.

Two western companies join forces to compete with Beil

Details about the company formed from the merger of BC Telecom Inc. and Telus Corp. :

Name: BCT.Telus Communications Inc. Headquarters: Burnaby, B.C., and Edmonton The market: Local, long-distance and cellular service in British Columbia and Alberta, with plans to sell data services to companies across Canada Foreign ownership:

GTE Corp. of Stamford, Conn., will hold 26.7 per cent Assets: $8.2 billion Stock market value:

$10 billion Annual revenue:

$5.7 billion Employees: 25,000

TOGETHERNESS

As for regular telephone users? “They will see a broader variety of services,” argues Petty. “They will have better interconnections nationally and globally.” Some of the global connections will be provided because of the relationship BCT.Telus has to GTE, which will hold 27 per cent of the new company. GTE now owns just over 50 per cent of BC Tel, but that share will be diluted by the merger. It will, however, give the U.S. company a smaller stake of a much larger company, notes Ian Angus, president of Angus Telecommunications Group. GTE is itself involved in a $81.6-billion merger with Bell Atlantic Corp. that will give it reach along the U.S. Eastern Seaboard and thus provide stronger U.S. links for the new BCTTelus creation.

Analysts say Bell Canada has only itself to blame for creating a formidable new competitor. “Bell forced BC Tel into the hands of Telus,” says telecommunications analyst Eamon Hoey of Hoey Associates Inc. It was Bell’s intention to form a national data network—as yet unnamed but given the working title Ñateo—that led to the BC Tel-Telus marriage, he argues. At first, Bell wanted to cut BC Tel in on the action, giving it an equity position. BC Tel was interested but foreign ownership rules prevented it from expansion outside the province. “We could be very successful in British Columbia, but everybody and their dog was able to come in and compete and we weren’t allowed to go outside,” says Canfield, who was BC Tel’s chairman. “That gave us real challenges in growth.” But when BC Tel realized it would have no clout in the new network, “We decided we weren’t interested in being a minority player in a company controlled by BCE,” says Calder.

Bell Canada president John MacDonald shrugs off the BC Tel story. “Thaf s life in the big city,” he says, adding that Bell was forced to develop plans for Natco because of Petty’s talks with AT&T. The Telus-AT&T tango was beginning to unsettle the participants in Stentor, the 66-year-old cartel operated by Canada’s 11 largest phone companies and dominated by Bell. Telus is a member of Stentor and was bound by a tacit agreement not to compete with the other phone companies. “But there were strong indications on the part of Telus that it wasn’t happy with this alliance,” MacDonald says. “And if it had done the deal with AT&T, we would have had a hole [Alberta] in our network.” With Telus moving to become a national presence, Bell had no choice but to set up its own national data network, MacDonald reasons. “It sent us a strong message and we felt we had to act,” he says. ‘We had to have stable service to offer to our customers.”

With AT&T out of the picture and Bell creating a national network, Telus, with yearly revenues of $2 billion, had to find some way to expand. ‘Telus has had a problem,” says Iain Grant, telecom consultant with the Yankee Group in Canada. “It’s traditional areas of business had come under threat from long-distance providers such as Sprint, cellular companies, and companies now providing local calls.” And it was surrounded. At its back was BC Tel with the clout of GTE and annual revenues of $3.1 billion. To the east in Ontario and Quebec lay the colossus of Bell Canada, with revenues of $9.2 billion. Two years

ago, BC Tel and Telus had talked briefly about some kind of union but the talks didn’t go anywhere. Then, when the AT&T deal failed, Telus turned to BC Tel. ‘We were having a meeting in mid-May on another matter and Don Calder and I looked across the table and said: ‘Should we get serious about this?’ ” Petty recalls.

The two companies say the marriage is a “merger of equals,” but it is clear Petty will run the show. The Santa Fe, N.M.-born executive has been named president and chief executive officer and, at last week’s press conference, he handled most of the questions. But Petty cautions: ‘We have to demonstrate secondarily to the regulatory authorities and primarily to our own employees that this wasn’t a takeover.” The merger, to be approved by shareholders in January, involves no cash, just a stock swap between the two companies: Telus shareholders receive .7773 of a share in the new company for each Telus share. BC Tel shareholders will get one share for each BC Tel share. BCT.Telus will operate for now from headquarters in both Edmonton and Burnaby, B.C., but with a total workforce of 25,000, company officials acknowledge that there will be layoffs.

The question for other Canadian phone companies, such as provincially owned SaskTel and publicly owned Manitoba Telecom, is where to put their loyalty. “I guess they have some choices to make,” says MacDonald of BCE. ‘We are still interested in working with small companies but I suppose they have another option now. I’m sure George Petty will want to talk to them as well.” Hoey rubs his hands in glee as he thinks about Québec-Téléphone, which is owned by GTE and operates in parts of Quebec outside the two major cities, in what is Bell’s backyard. The company is not involved in the western merger, but there were some suggestions it could, in the future, become part of the BCT.Telus network. That would then give Bell a bigger problem. “QuébecTel could be like Fidel Castro coming down from the hills,” Hoey says.

Analysts expect there could be future deals for BCTTelus. One possible partner could be Toronto-based Call-Net Enterprises Inc., which owns Sprint Canada Inc. Telus had looked at buying CallNet before making the BC Tel deal as a way to build a national network but backed off because the price was too high, Petty said. Even AT&T could be back in the cards, although Petty says that isn’t now an option. Such matchups would give the company national networks and allow it to sell long distance to the corporate clients it hopes to sign up for data services. As for Stentor, the death knell for that alliance was rung when news broke of Petty’s attempt to forge a merger with AT&T. But both Bell and the new BCT.Telus entity insist Stentor will continue in some form, providing such services as 1-800 numbers.

Meanwhile, chairman Canfield says the merger is definitely not the final chapter in the BCT.Telus tale and other deals could follow that would redraw the map of Canada’s telecommunications industry still further. With the determined and plucky Petty at the helm, Canfield is undoubtedly right.

ANDREW CLARK

WARREN CARAGATA