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BT Goes Global – Again!

U.K. incumbent BT Group plc (NYSE: BTY; London: BTA) is on the empire-building trail again. It is buying international services provider Infonet Services Corp. (NYSE: IN) for $965 million in cash, or $2.06 for each of Infonet's 468 million shares (see BT Buys Infonet).

Infonet will ultimately be merged with BT's Global Services division, which has its stronghold in the U.K. and continental Europe.

Infonet has about 1,800 multinational companies as customers, local operations in 70 countries, network access agreements in another 180, and points of presence in 3,000 cities. Although very strong in Europe, Infonet will give BT customers and assets in North America and Asia/Pacific that it doesn't now have.

BT says the move fits neatly with its strategy to deliver a wide range of services to multinational companies on a global basis. "We've always said we'd make acquisitions that enhance, not change, our strategy," said BT's CEO Ben Verwaayen in a conference call this morning.

The British operator reckons the deal will achieve annual savings of $150 million within the combined operations withing three years, and that the deal will increase cashflow after the first year.

But the deal may give some of BT's shareholders a worrying sense of déja vu. The British carrier has had a stab at becoming a global force before, but its Concert joint venture with AT&T Corp. (NYSE: T) was a costly disaster (see AT&T and BT to Unwind JV and BT Makes Big Loss).

During the conference call, Verwaayen was quick to note that this isn't another Concert. "This is not a joint venture. This is a very focused acquisition, and not old history again."

Despite that assurance, BT's investors were initially unconvinced. BT's share price dropped 4 pence, more than 2 percent, to £1.88 (US$3.49) on the London Stock Exchange.

And analysts at Lehman Brothers are initially cautious as well. In a research note issued this morning, the Lehman team noted that "BT has been expected to look for more scale in its Global Services business, its only growth asset. The acquisition is likely to be viewed as an unwelcome return to international acquisitions just when shareholders are looking for more cash to be returned."

Infonet's stock, meanwhile, had risen in New York on Friday, up 12 cents, about 6 percent, to $2.07, and up again in after-hours trading by another 8 cents, nearly 4 percent, to $2.15.

The Yankee Group analyst Camille Mendler is more sanguine about the acquisition. She says the deal gives BT a strong asset, as Infonet is "great at customer services and customer retention. It's excellent at increasing the value of its contracts once it has signed a customer. It has done this by having a very personal approach with its customers, and by empowering its in-country managers, who have dealt directly with local service providers to organize network access. The challenge for BT is to maintain this personalized approach...

"It also gives BT strength in the mid-sized multinational market, which is the typical size of an Infonet client. BT has been busy concentrating in very large multinationals with its ICT strategy," says Mendler (see BT Launches Global Campaign, BT Inks ICT Deal With HP, BT Bolsters Its ICT Story, and BT Launches Outsourcing Offensive).

Mendler says the competitors that will feel most threatened by this move are AT&T Global Network Services, the T-Systems Inc. division of Deutsche Telekom AG (NYSE: DT), and France Telecom SA's (NYSE: FTE) international services business, Equant (NYSE: ENT; Paris: EQU).

"Equant has been trying to preempt such a move by building up its IT services, but BT has a lot of credibility in this space," says the analyst.

While BT is paying $965 million, Infonet has net cash of $390 million, which means the aggregate cost to BT is $575 million. The deal is expected to close in the first half of 2005 following regulatory and Infonet shareholder approval, though nearly all of Infonet's shareholders, six other major carriers from Europe and Asia, have already committed their support to the deal. BT says the deal can't be scuppered by a higher rival bid.

The Infonet shareholders adding to their bank balances from this deal are: Japan's KDDI Corp., Dutch incumbent KPN Telecom NV (NYSE: KPN), Swisscom AG (NYSE: SCM), Spain's Telefònica SA, Scandinavian operator TeliaSonera AB, and Australia's Telstra Corp.

Those shareholders have been selling Infonet services, accounting for about 30 percent of revenues, and BT says that, at least in the short term, those carriers will continue as sales channels. BT did say, though, that it has struck a specific deal with KDDI whereby the Japanese operator will work with BT to sell the Infonet services, though details of the relationship had not yet been agreed.

Infonet recorded revenues of about $622 million and a net loss of $67 million in its latest financial year, while BT Global Services generated more than £1.4 billion ($2.6 billion) in revenues in the first fiscal quarter that ended June 30 (see Infonet Reports 2004 Net Loss and BT Group Reports Q1).

BT said the deal won't affect its medium-term goal of a net debt of £7 billion ($13 billion). At the end of June, BT had a net debt of £8.3 billion ($15.4 billion).

Infonet will announce its latest quarterly results this Wednesday, while BT will unveil its latest numbers a day later.

— Ray Le Maistre, International News Editor, Light Reading

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