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GTS Saga Spells Caution in EuropeGTS Saga Spells Caution in Europe

European service providers like GTS are facing the same sort of problems as their American counterparts

April 5, 2001

4 Min Read
GTS Saga Spells Caution in Europe

As Global TeleSystems Inc. (GTS) (NYSE/Frankfurt: GTS) announced its yearly earnings today, the carrier focused attention on trends in the European telecom market -- and highlighted the folly of looking there for relief from stateside woes.

GTS, which has changed its name to Ebone, reported that revenues for the year 2000 were 1,110 million euros (US$999 million), up 38 percent from 1999. Quarterly revenues were 291 million euros ($261.9 million), up 19 percent from the same time last year but up just 1 percent from the preceding quarter.

"We are off the critical list and well on our way to becoming a great success," CEO Robert J. Amman told analysts on a conference call this morning. But as Amman outlined the results of the complex restructuring GTS has undergone this year, he said many of his peers in the European telecom market remain in a state of "denial."

Indeed, GTS's is a cautionary tale. Less than two years ago, the carrier was on track to become an enormous global player. It acquired Hermes Europe Railtel, a multi-country fiber optic backbone network. It purchased a trio of voice telecom companies: Esprit Telecom plc, Omnicom SA, and NetSource Europe. It bought Ebone, a European Internet backbone. And it set up a joint venture with Flag Telecom (Nasdaq: FTHL; LSE: FTL) to build a transatlantic cable called FA-1.

But fortune didn't smile on GTS's plans. A range of forces, including high capex spending and a widespread reduction in voice service prices stemming from European deregulation, forced GTS to revamp its goals. In order to stay afloat, it's thrown everything overboard but data services based on the Ebone network (see GTS Moves up Debt Danger List).

Through a series of complicated transactions, the company says it's financed its new data-only business plan through the first quarter of 2002.

The specific actions GTS has taken to improve its prospects include rewriting the terms of its bank loans and either selling its voice subsidiaries outright or selling most of the shares GTS holds in them.

GTS also has set up an agreement that effectively retires $500 million in debt for Esprit Telecom. This is a crucial step, since the Esprit debt was a major contributor to GTS's autumn 2000 crisis.

But GTS may not be out of the woods just yet. The company reported heavy losses in EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) for 2000, in part due to restructuring activities, such as bad debt writeoffs. Overall EBITDA was minus 129.3 million euros ($116.37 million) for the year and minus 82.6 million euros ($74.34 million) for the quarter. These losses represent increased losses of 73 percent and 53 percent in yearly and quarterly EBITDA losses for 1999.

All this doesn't make a pretty picture, since EBITDA is a generally accepted measure of liquidity. But GTS insists that jettisoning its voice business and arranging its finances differently will result in growth this year. The company also has slashed capital spending, and instead of focusing on wholesale services to other carriers, it's going to seek opportunities among enterprise businesses and service providers that can make use of the facilities the carrier now has in place, such as Web hosting.

"I'm quietly confident about our future results," says Duncan Lewis, GTS's COO, who will take charge of the company once the restructuring is complete.

The company won't be specific on guidance, saying only that it plans a May 2001 conference with analysts and investors in New York City, where more details will be revealed.

Analysts say the tale of GTS proves that vendors and carriers who claim that Europe's telecom business is booming in the wake of U.S. losses are whistling in the dark.

"I ran into a European investor and mentioned that everyone I talk to is looking to the European market for relief," says Stephen Kamman, analyst at CIBC World Markets. "He told me all his European acquaintances are looking to the U.S."

While the European market is slightly less volatile than the U.S.'s, Kamman says, Europe shares the same problems, albeit lagging the U.S. by two to three months. Plenty of startup carriers are struggling (see Letter From Europe). What's more, Europe has problems of its own. This year, for instance, he says that carriers that invested heavily in wireless infrastructure are taking a hit, as their plans to auction off wireless subsidiaries hit the skids in the capital markets.

"Carriers in Europe are doing the same thing they are in the U.S.," he says. "Pulling back and re-evaluating, rethinking how and when to go to market and just what to offer."

- Mary Jander, Senior Editor, Light Reading http://www.lightreading.com

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