BUSINESS

Sorry, wrong number

Unitel is fighting hard to stay afloat

TOM FENNELL July 10 1995
BUSINESS

Sorry, wrong number

Unitel is fighting hard to stay afloat

TOM FENNELL July 10 1995

Sorry, wrong number

BUSINESS

Unitel is fighting hard to stay afloat

In September of 1993, John and Barbara Landry decided to hang up on the country’s largest phone company, Montrealbased Bell Canada. Fed up with what Barbara Landry describes as Bell’s arrogant attitude, they switched to Unitel Communications Inc.—Bell’s major competitor in the newly deregulated long-distance market. The Landrys, who own an eight-person plumbing business, say that they have since pared back the cost of their long-distance phone bills. For Barbara Landry, however, there is something even more important than reducing expenses. “Savings are great,” she says, “but it’s kind of nice to deal with someone who doesn’t act like they are doing you a favor.” Unfortunately for Unitel, such testimonials are no guarantee of survival in the increasingly cutthroat long-distance market. In fact, the company’s senior managers were meeting with its creditors last week in an eleventh-hour bid to extend a June 30 deadline for repayment of $650 million in loans by 30 to 60 days. For her part, Landry says it will be a shame if Unitel is forced out of business. “If competition disappears,” she predicts,

“rates will go back up.”

The irony, of course, is that the rapid reduction in long-distance charges in the last few years is precisely what has pushed Unitel into deep financial trouble. Since 1992, when the Canadian Radio-television and Telecommunications Commission (CRTC) opened the industry to competition, rates have fallen by 50 per cent, dealing a severe blow not only to Unitel but to many of the other 150 large and small firms competing in the sector. Even mighty Bell has not been immune from the fallout.

Last week, the giant utility unveiled a voluntary “separation” program that is part of a restructuring plan intended to eliminate nearly 10,000 jobs—out of a workforce of 46,000—by 1998.

In Unitel’s case, the problems go beyond an inability to repay massive debts. Equally pressing is the question of the company’s ownership. In April, Rogers Communications Inc., which owns 29.5 per cent of the company, decided not to exercise its option to buy Canadian Pacific Ltd.’s 48-per-cent share of the company for $200 million. Unitel then hired J. P. Morgan & Co. Inc., a New

York City investment banker, to find a buyer for the company. But analysts speculate that Rogers only backed away from Unitel in an attempt to negotiate a better deal, and may yet buy the railway company’s share of the firm. “Unitel is worth more to Rogers than anyone else,” said Jonathan Robinson, a telecommunications analyst with ScotiaMcLeod Inc. in Toronto. ‘They

know Unitel and what has to be done.” Unitel, known before 1990 as CNCP Telecommunications Inc., is one of the country’s oldest telecommunications companies. But in its determination to compete with Bell, the firm lost nearly $224 million in 1994. In April, Rogers and AT&T Corp. of New York, which owns 22.5 per cent of Unitel, agreed to pump $45 million into the company to keep it afloat until June 30. Stan Kabala, Unitel’s chief executive and president, said last week that the firm still has enough money from that infusion to continue and is in “active discussions” with its creditors, in-

cluding six banks. But Kabala points out that the firm’s operating expenses have fallen dramatically over the past year because of staff reductions and tougher budgeting. Analysts say Unitel still suffers from high labor costs, which include wages paid to about 2,400 unionized workers. In addition, interest on the company’s debt is running at $70 million a year—more, in fact, than the entire advertising and promotions budget at Toronto-based Sprint Canada Inc., another major player in the long-distance market. “It’s not rocket science,” said Robinson, “Unitel’s costs are too high for the size of the company. Period.”

Before Rogers reveals its intentions, analysts say that the media conglomerate wants to exact a number of concessions from Unitel’s other owners and creditors. For starters, Rogers presumably wants to pay CP considerably less than $200 million for its stake. And under the terms of any deal with the banks, Unitel’s lenders will likely have to swap their debt for shares in the firm. “The banks will have to take a haircut,” said one analyst. “Everyone will have to give a bit for Unitel to survive.” Although Kabala refuses to disclose which firms are actively pursuing a stake in Unitel, he does confirm that the negotiations involve “selling the firm in its entirety as a going concern.” Some observers suggest that Sprint Canada Inc. could be a likely candidate to buy all or part of Unitel. But Juri Koor, chief executive and president of Sprint Canada’s parent company, Call-Net Enterprises Inc., said that Unitel appears unwilling to open its books to some of its competitors. Said Koor: “Not enough information has been made available to us.”

For all the talk of a possible buyout, Kabala says that Unitel’s future—and that of the entire longdistance sector in Canada—is ultimately in the hands of the CRTC. Under current CRTC regulations, long-distance companies must pay Bell and its counterparts in other parts of the country as compensation for the use of local lines and facilities. Kabala insists that the compensation rate is too high, and has called on the CRTC to reduce it; a decision is likely in October. If the rules are not changed, analysts say the industry could soon be hit with a number of bankruptcies— something Koor warns would undermine the confidence of consumers. He added: “My preference is to have a very strong, reliable long-distance network that competes with Bell.” For much the same reason, the Landrys hope the phones will keep on ringing at Unitel.

TOM FENNELL