Business

Sprint Canada on hold

As the long-distance brand celebrates a mega-merger in the United States, executives at its counterpart in Canada fight to keep their jobs alive

Danylo Hawaleshka October 18 1999
Business

Sprint Canada on hold

As the long-distance brand celebrates a mega-merger in the United States, executives at its counterpart in Canada fight to keep their jobs alive

Danylo Hawaleshka October 18 1999

Sprint Canada on hold

Business

As the long-distance brand celebrates a mega-merger in the United States, executives at its counterpart in Canada fight to keep their jobs alive

Danylo Hawaleshka

William Esrey, the chief executive of Sprint Corp., was riding his horse—“in the middle of Colorado in the middle of nowhere”— when he got a call on his satellite-linked phone from Bernard Ebbers, the Edmonton-born billionaire who heads MCI World-Com Inc. Executives at the two U.S. telecommunications giants had been talking merger and Ebbers, a big man with a folksy manner, called Esrey to see whether he could close the deal. At a news conference last week to announce the biggest corporate merger in history, Esrey and Ebbers joked about the satellite phones poor sound quality. “I thought he agreed to a lot lower number than he did,” said Ebbers.

Amid the static, the pair came to terms on the $ 170-billion union of Clinton, Miss.-based MCI WorldCom and Sprint of Westwood, Mo., respectively the secondand third-largest long-distance carriers in the United States. The new company, to be known as WorldCom, will control 37 per cent of the U.S. long-distance market, second only to New York City-based AT&T Corp.’s 43 per cent. While the deal must clear regulatory hurdles, many industry analysts think it will go through. Ebbers had no choice but to make a deal like this one, says Eamon Hoey, a Toronto-based telecommunications expert. Todays big telecom firms are all jockeying to provide the world’s 50,000 biggest corporations with a combination of local, long-distance, Internet, wireless and data services. “What they’re chasing,” says Eloey, “is 50,000 customers that equate to one quarter of the world’s traffic.”

At the Sprint brand’s Canadian counterpart, the future is a lot less certain. In fact, for CallNet Enterprises Inc. of Toronto, the WorldCom deal could not have come at a worse time. Sprint in the United States owns 25 per cent of Call-Net, which owns and operates Sprint Canada Inc. under a licensing agreement with the U.S. company. Because of the U.S. merger discussions, Sprint’s talks on a new branding and technology agreement with Call-Net were put off. The current deal, which allows the Canadian firm to use the brand name, expires in 2003.

There are complex questions about who will own and who will run the troubled Call-Net, which is more than $2 billion in debt. Last week, Burnaby, B.C.-based BCT.Telus Communications Inc. expressed interest in buying all or some of the firm. But Call-Net’s directors may not be around to explore that option; they are on the verge of losing their jobs. Had the brand talks with Sprint been completed, Call-Net’s management team could have trumpeted a deal at a pivotal shareholders’ meeting in Toronto this Thursday. Crescendo Partners LP of New York, which represents a dissident group of shareholders, called the meeting with the express purpose

of ousting six of nine Call-Net directors, including CEO Juri Koor, and wants to sell the company whole or in parts. Koor told Macleans that he continues to believe in Sprint Canadas business plan, which includes the current launch of local phone service across the country. Koor also said negotiations on the use of the brand name should resume soon and that relations with Sprint are very good. “There is no reason,” he says, “why those good relationships wont continue.”

Call-Nets problems began to escalate in June of last year, when the company bought Montreal-based Fonorola Inc. for $1.8 billion. Some analysts think Call-Net paid far too much for Fonorola, which had a national communications network and another in the United States. Analyst Ian Angus contends that Call-Net also botched the integration of the firms by firing key Fonorola executives before Call-Net managers had a chance to learn the business. Things got worse when, a month later, Sprint Canada launched the first nationwide flat-rate long-distance plan. Customer response overwhelmed the company’s equipment and forced Call-Net to cap calls at 800 minutes a month for $20. With arch-rival Bell Canada and other competitors matching those bargainbasement rates, profit margins were crushed.

The fiscal year ended with Call-Net posting a 1998 loss of $236.7 million, followed by 1999 quarterly losses of $65.7 million and $125 million. Between Aug. 3, 1998, and Aug. 3 this year, the price of its voting shares dived from $23.10 to just $7.35, a loss of almost 70 per cent. Last week, the stock closed at $9.60, amid speculation of an imminent sale.

In the thick of Call-Net’s battle for survival is Crescendo, the Park Avenue vulture fund headed by arbitrage specialist Eric Rosenfeld. Last June, he began buying company shares

and by mid-September, having paid an average of about $ 10 a share, held almost 10 per cent of Call-Net’s voting stock. That stake enabled Crescendo to call this week’s shareholder vote—and Rosenfeld says he has majority support to toss out most of the current managers and replace them with a new team, including former Rogers Communications Inc. executive Colin Watson as chairman. “If you look at the consolidation in the industry,” says Rosenfeld, “you see that there are companies a lot larger than Call-Net—Sprint in the U.S. is a good example—that feel they need to be part of another company.”

Rosenfeld, who last May successfully got rid of Spar Aerospace Ltd.’s board and is looking to dismande that company, was also the one to reveal that BCT.Telus is interested in buying part or all of Call-Net. Call-Net chairman Lawrence Tapp said in a statement that the company was willing to discuss BCT.Telus’s proposal before the shareholders’ meeting. Muddying the waters, though, was his letter to shareholders that said: “Simply put, this is not the right time to sell.” For its part, one of Call-Net’s many concerns is that Rosenfeld— having bought at a low price—would setde for a lot less than the firm is worth. Some analysts agree, and Hoey advises investors to hang on to the stock to see whether WorldCom injects some capital into Call-Net.

The Institutional Shareholder Services, a voting advisory service in Canada, last week recommended that institutional investors, mutual fund managers and other shareholders vote against Crescendo’s proposal. Sprint Corp. also threw its support behind Call-Net’s management. “That’s an important statement,” says Angus. “It could mean that if the company is sold the support of Sprint wouldn’t go with it.

That would make the company worth much less in the marketplace.”

Call-Net is in a position where it either has to strike a rushed deal with a telecom like BCT.Telus or gain enough shareholder support to win the vote at this week’s meeting. If Crescendo carries the day, Rosenfeld will sell. How much he would get for Call-Net, however, will depend on whether he can persuade Sprint to continue its branding agreement. At the news conference to announce the WorldCom deal, Ebbers said he values the Sprint and MCI brands, but added: “We haven’t had a lot of time to talk with our marketing departments about how to deploy or use these names effectively.” Until several questions are answered, Call-Net’s future remains on hold. EH