BUSINESS

INTO THE MAJOR LEAGUES

CALL-NET HAS BECOME THE THIRD MAJOR COMPETITOR IN CANADA’S LONG-DISTANCE MARKET

DEIRDRE McMURDY August 23 1993
BUSINESS

INTO THE MAJOR LEAGUES

CALL-NET HAS BECOME THE THIRD MAJOR COMPETITOR IN CANADA’S LONG-DISTANCE MARKET

DEIRDRE McMURDY August 23 1993

INTO THE MAJOR LEAGUES

BUSINESS

Juri Koor was supposed to be relaxing in the warm sun of California’s Napa Valley wine country, not haggling with lawyers in a stuffy Toronto office. But despite his keen interest in wine, and his need for a break after 18 months of frantic activity, there is one temptation that Koor, the chief executive officer of Call-Net Telecommunications Ltd. of Toronto, says that he can never resist: a good business deal. So, when it became apparent that his company was close to concluding three months of intense negotiations with Sprint Corp. of Kansas City, Koor postponed his vacation plans repeatedly. On Aug. 4, Call-Net signed an agreement that catapults it into the middle of a major-league competition for Canada’s recently deregulated long-distance telephone business. “In one move,” said Ian Angus, a Toronto-based telecommunications consultant, “Call-Net becomes a serious player in the Canadian market and expands its potential for new business.”

The deal announced between Sprint and Call-Net, which is potentially worth $160 million over the next 10 years, is the third “strategic alliance” between a Canadian and a U.S. telephone company. Already, Unitel Communications Ltd. of Toronto has concluded a deal with American Telephone and Telegraph Co. of New York, and Bell Canada Inc. has teamed up with MCI Communications Corp. of Washington. According to industry experts, Bell Canada’s historic dominance of the telecommunications sector and a widely scattered population, which is less efficient and more expensive to serve, have contributed to a significant lag in Canada’s telecommunications technology and services. As a result, since federal regulators opened the $7.5-billion long-distance telephone market to competition in June, 1992, there has been a scramble to upgrade facilities and reduce prices to secure market share under the new rules. So far, such companies as Call-Net have successfully acquired access to the latest technology by offering voraciously competitive U.S. telephone utilities— which have been deregulated for a decade—the opportunity to join forces and create a continentwide telephone network in the world’s largest free-market trade zone.

For Canadian consumers, the strengthened presence of CallNet in the long-distance arena ensures that, unlike the airline business, market deregulation will not devolve into a narrow duopoly comprised of Unitel and Bell. Although Call-Net has focused on the small and medium-sized business segment of the telephone industry to date, it is now poised to expand quickly into the lucrative large business and residential markets. In exchange for a 25-per-cent equity stake and royalties, Call-Net has the use of all of Sprint’s technological and marketing expertise. Noted Koor: “Right now, there’s a window for companies to grab long-distance market share in Canada. But the industry is maturing fast and we have to strike now.”

By the fourth quarter of this year, Koor says, Call-Net will be established in the $3biílion-a-year residential long-distance market-aided by a generous advertising budget and the popular appeal of Sprint’s official representative, actress Candice Bergen. The company also expects to have a toehold among major corporate clients in the near future. In that market, where telecommunications costs are typically the highest operating expense after rent and salaries, the welcome mat is already being unrolled. Declared Joseph Schmidt, president of the Canadian Business Telecommunications Association, a lobby group representing 340 major businesses: “For telecommunications customers, this new alliance makes deregulation much more real. We’re delighted to see the market opened even further.”

For its part, Call-Net is clearly expecting great things from the new association. By the end of 1993, the company is forecasting a base of 20,000 customers and revenues of

about $175 million. At the end of 1992, CallNet had 16,000 customers and earnings of $1.7 million on revenues of $82.8 million.

CALL-NET HAS BECOME THE THIRD MAJOR COMPETITOR IN CANADA’S LONG-DISTANCE MARKET

That optimistic outlook for the future is especially significant because its corporate history has closely paralleled that of the telecommunications industry. After a rocky start in 1986, the company spent years defying federal regulators at the Canadian Radio-television and Telecommunications Commission (CRTC) and an increasingly uneasy behemoth, Bell Canada, for the right to exist. CallNet began life as a “reseller”—leasing facilities from Bell at wholesale prices and marketing its enhanced telephone services to business customers. But in a tightly regulated market, the enterprising upstart was soon perceived to be encroaching on Bell’s protected turf and regulators repeatedly ordered it to cease operations. On four separate occasions, the federal cabinet intervened directly to save Call-Net. The Conservative government was, at that time, caught between two conflicting policy directives: the commitment to competition and small-business development on one hand, and the imperative to ensure a stable, affordable national telecommunications system on the other.

By 1991, although the notion of deregulated long-distance markets was accepted as the solution to that conflict, Call-Net was badly battered by its struggle to survive. Exhausted by expensive legal and regulatory battles and the effort to establish itself in a capital-intensive sector, the company was undercapitalized and, no longer able to borrow money from banks, it was reliant on a group of private venture capitalists—including Koor. Despite their support, however, the company lost $5 million on revenues of $68.7 million and posted a working capital deficit of over $11 million in 1991.

Then, in the fall of 1991, Koor took the reins at Call-Net and set about restructuring and re-financing the beleaguered operation. He assembled a new team of senior managers and sales representatives. Early in 1992, Call-Net raised $20.6 million in private equity and debt financing to restore its balance sheets as a prelude to an initial public offering of shares.

Bolstered by the CRTC’s decision in June, 1992, to deregulate long-distance markets, Call-Net raised $33 million through an oversubscribed issue of 2.5 million shares. Three months later, the company raised another $31 million through an issue of stock warrants. In March, 1993, it used that capital to pay $9.6 million for Tell Canada Telecommunications Group Ltd. of Toronto. The same month, it spent $35 million to acquire the long-distance business of Cable & Wireless Canada Inc. “We didn’t plan to grow quite so fast,” said Koor. “But you have to pounce when the deal is there.”

Despite the emphasis on steady expansion and reinvestment in Call-Net’s business, Koor says that he is being extremely vigilant about controlling costs and bureaucratic layers. In 1992, despite its rapid growth spurt, Call-Net’s operating costs were reduced to 27.5 per cent of revenue from 33.5 per cent. Noted Koor: “We’re working hard to stay lean and responsive—it’s so easy to get fat that we’re trying to pre-empt that as we go.”

To build on the new alliance with Sprint, Call-Net is now planning to raise another $100 million in equity and to expand its board of directors. A listing on the NASDAQ Stock Exchange in New York City and closer ties to the major U.S. institutional investors are also on the horizon, according to Koor. The company as well is keeping an eye on other potential acquisitions to boost its national customer base. But last week, after the latest flurry of activity at Call-Net, Koor was planning to take his vacation at last.

DEIRDRE McMURDY