Dangerous Living In Telecom's Top TierDavid Greising
By finally capturing long-distance transmission company WilTel after three months of negotiations, LDDS Communications Inc. has opened the door to new speculation. It could continue growing and vie with Sprint and MCI for the share of the long-distance market that dominant AT&T doesn't control. Or it can wait for a Baby Bell to gobble it up when Congress clears the way for them to compete in the long-distance business. Sprint, MCI, or even an information-services company such as Electronic Data Systems Corp. also might be potential LDDS acquirers.
Interesting possibilities, all. But in the interim, the long-distance operator, based in Jackson, Miss., has some issues to deal with in the here and now. The $2.5 billion cash purchase of WilTel, announced on Aug. 22, comes fresh on the heels of the signing of a definitive agreement on Aug. 1 to acquire international telecommunications player IDB Communications Group Inc. in a $700 million stock swap. If the deals come off, the combined companies will have revenues of more than $3 billion.
But LDDS will still only be the No.4 long-distance player, with a scant 3% of the market. And LDDS Chief Executive Bernard J. Ebbers must prove that he can pull together the three operations under intense competitive pressure. "Can we handle it?" asks Ebbers. "I guess that remains to be seen."
OVERSEAS CONNECTION. Ebbers, of course, sees the deal as a golden opportunity. Until now, LDDS has leased phone lines from larger rivals. Gaining access to Tulsa-based WilTel's 11,000-mile network, Ebbers figures, will cut leasing costs that would have topped $140 million next year. And, he says, it will enable LDDS to add new customers without adding leasing costs. WilTel, moreover, generates handsome profits: Mabon Securities Corp. expects earnings of $110 million this year on revenues approaching $1 billion. That, and no WilTel debt, convinced bankers to lend Ebbers the entire purchase amount and roll LDDS's remaining debt into a new $3.2 billion loan.
The other big advantage of the deal: it may finally allow LDDS to go after the lucrative business market. WilTel's national system is all digital, which Ebbers hopes to market as a big advantage over rivals. And IDB will dramatically increase LDDS's international business, which currently amounts to only about 4% of sales.
There's plenty of room for second-guessing the WilTel deal. After initially bidding $2 billion for the company in May, Ebbers raised the offer to $2.5 billion to lure a reluctant Keith E. Bailey, CEO of parent Williams Cos., into the deal. The final tab: a hefty 17 times earnings. "Williams got a very attractive price," says Robert L. Christensen Jr. at Mabon Securities. Adds Bailey: "Now it's up to them to prove the price they paid was worth it."
That may be hard to do. Because of a glut in fiber-optic-cable capacity, it may not pay to own a network at this point. Since 1989, the prices for leased-cable rates have dropped some 80%. Gerald Taylor, president of MCI Communications Corp., figures that in today's telecom market, a long-distance operator can do just as well leasing as owning when the costs of depreciating equipment are factored in. "This move doesn't buy him efficiencies or intelligence [advanced network management features]," says Taylor. "What he does get is a company with significant market share."
AUCTION TIME? That, says Taylor, suddenly makes LDDS a far more attractive takeover candidate. He figures that the best fit could be with a computer-services company. With a long-distance arm, such a company could sell comprehensive information-network "solutions" to corporations. "I think they would be great for EDS. IBM needs one, too," says Taylor.
So far, LDDS's competitors are hardly shaken. "This doesn't change the industry equation," says Sprint spokeswoman Susan Kraus, who declines to comment on the possibility of a Sprint takeover. But there is another factor that could: Some investors expect dealmaker John W. Kluge, who controls a 20% stake through his Metromedia Co., to push for a sale of LDDS to a competitor. Partly because of the takeover talk, LDDS shares have bounced back to around $24, up from $14 after a disappointing first-quarter earnings report. But if the WilTel merger and the IDB deal work out the way Ebbers hopes, it might pay to bet on the long-range prospects of LDDS as a scrappy No.4 in the long-distance race.