Global Crossing goes to sea with C&W deal

The growth by acquisition trend is flowing into the doors of Global Crossing's watery Bermuda headquarters. Saving money while dropping cables appears to be the agenda with the acquisition of Cable & Wireless' Global Marine subsidiary, which was announced last week, just weeks after Global Crossing announced its acquisition of Frontier Corp.

Under terms of the agreement, Global Crossing will pay $885 million in cash and assume debt for Global Marine, which provides installation and maintenance services for undersea fiber optics.

"It might seem like a premium price, but this is very worthwhile for us to get into," said William Carter, president of Global Crossing Development Company, who will become chairman of Global Marine. Global Crossing had expected to spend $80 million to $100 million annually to install and maintain its undersea network, so the deal made a lot of financial sense, Carter said.

With C&W eager to home in on operating its network and Global Crossing willing to pay heavily for the subsidiary, the sale matched well, too.

"This sale is in line with our increasing focus on the operation of communications networks, in particular data and Internet. The price represents a good value for our shareholders, and the cash realized will strengthen our position to invest in the networks and services of the future,"said Stephen Petit, executive director of C&W global businesses.

In return for the $885 million, Global Crossing gets 13 cable ships, 21 submersible vehicles and 1200 employees. Global Marine will also bring an extensive customer base, including long-term services contracts with AT&T, NTT, Deutsche Telekom, MCI WorldCom, BT, Telefonica, Singapore Telecom and submarine cable contractors Tyco, Alcatel and KDD.

"This deal makes a lot of sense, especially if they continue to put out supply contracts" to open bids to get competitive pricing, said Stacey Yates, a senior analyst with KMI Corp. As long as they do that and keep Global Marine as a separate entity, it will serve Global Crossing well, Yates said.

Carter said Global Marine will operate as an independent division, which he expects to generate $100 million in the current fiscal year and help facilitate the growing demand for undersea cable. "The explosion in telecommunications is coming, and this helps us meet that demand," he said.

Hambrecht and Quist analyst Jeff Lipton agrees. "The demand is clearly very strong for undersea capacity and the trick is that you want to build enough capacity to accommodate your needs a few years out."

Others are also trying to tap into capacity needs but are hitting various problems. "Consortium cables have come under increased scrutiny from regulators, as evidenced by the special attention that the FCC has paid to the conflict between the Japan-U.S. consortium and Global Crossing," said Michael Ruddy, senior fiber optic analyst at Pioneer Consulting. "At the same time, emerging carriers have become increasingly critical of the consortium model." The end result would be an increased tendency for two or more private cable operators to compete along a route previously controlled by a single consortium cable, he said.

Project Oxygen, scarred with the description as a planned global undersea network, has had difficulties securing financing. Companies such as Global Crossing with a flowing revenue stream generally have an easier time securing financing, Yates said. But, Project Oxygen's concept could radically change how capacity is purchased on the international level, she said. International carriers such as MCI WorldCom and Viatel are also taking a facilities-based approach and dropping their own cable.

With so much demand for fiber in the world's oceans, is there enough equipment to meet the needs for the buildouts? There is no shortage of fiber at this point, but Global Crossing sometimes has trouble getting enough repeaters, which re-amplify and strengthen signals traveling long distances undersea, said Carter.