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C&W Buys British Bulldog

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News Analysis
Light Reading
5/28/2004

Cable & Wireless plc (NYSE: CWP) bought its way into the U.K.'s business DSL market today with the £18.6 million (US$34.1 million) acquisition of local loop unbundler Bulldog Communications Ltd. (see C&W Buys Broadband Operator).

Until now, C&W has been reselling BT Group plc's (NYSE: BTY; London: BTA) business DSL service to its customers. But market conditions have changed in the past year, making the ownership of a broadband business such as Bulldog attractive. Demand is growing for the high-speed business broadband services, and regulatory pressure has made the local loop unbundling process much cheaper (see BT Cuts DSL Wholesale Rates and Ofcom Promotes LLU in UK).

C&W spokesman Peter Eustace says Bulldog gives C&W a "head's start in the business broadband market, an established footprint, and an experienced team. Through the local loop unbundling process we can develop our own differentiated services instead of buying and providing the vanilla service from BT."

Only one other competitive carrier, Easynet Ltd., has made any significant progress in the local loop unbundling market in the U.K. (see Easynet Upbeat on 2003 Results).

According to C&W, Bulldog has 63 staff, annual revenues of about £9 million ($16.5 million), with assets of just £1.6 million ($2.9 million) at the end of 2003, and has its own equipment in 38 of BT's London exchanges, which gives it access to 52,000 businesses and 400,000 homes. Costs can be taken out of the business, because C&W has its own national U.K. backbone that can carry Bulldog's traffic, so eliminating the cost of paying BT for transit.

C&W's Eustace says Bulldog will receive fresh funding to unbundle a further 160 BT exchanges during the next few months. Given that the cost-per-exchange of that process is about £50,000, C&W will be pumping at least £8 million ($14.7 million) into the business in the short term. That should spell good news for Bulldog's sole systems supplier, Alcatel SA (NYSE: ALA; Paris: CGEP:PA).

Eustace says the Bulldog business will remain as a standalone unit within C&W, and that members of the core management team have been offered incentives to stay with the business. C&W will also retain the residential broadband service part of Bulldog (see Bulldog Cuts DSL Prices).

Neither C&W nor Bulldog will say how much had been invested in the operator by Omnia Ltd. and Fresh Capital Group, though Bulldog did receive a £10 million ($18.4 million) round of funding from these companies in February 2002.

And neither party will say how many customers Bulldog has at present, though Point Topic Ltd. analyst Tim Johnson, who has just completed a study of the business broadband market, reckons Bulldog has about 10,000 business customers, of which about 2,000 are using the SDSL service (see Report: Business DSL Prices Fall).

Johnson says the deal is good for both parties. "There's an opportunity in business broadband, and if C&W gets this acquisition right it could take a big chunk out of BT's business market."

He says Bulldog has developed a "key strategic position and has the most sophisticated unbundled offer. The team there knows in their bones what is needed to provide a replacement for the lucrative leased-lines business, and they understand unbundling."

But without the kind of funding C&W can provide, Bulldog was "unlikely to grow much. You need money to fully exploit the unbundling market. Without backing, it would have been a small, struggling player with a good reputation."

Key to that good reputation has been Bulldog's technical awareness. "It has the best technology solution by far. That comes from the CTO, Gavin Young," says Johnson.

Young should know a thing or two about DSL. He spent 15 years at BT's R&D labs, where he worked on video-over-DSL developments and unbundling issues, and he's technical chairman of the DSL Forum.

So did C&W get a bargain? Johnson says it depends how you look at the company's financials, but he points out that Bulldog has had to go through three years of pain to get where it is today and that C&W has moved just as unbundling conditions are improving. "At the height of the bubble they [C&W] would have had to pay 10 times as much."

But Johnson also has doubts about C&W's ability to capitalize on its new asset. He says C&W doesn't have a good M&A track record, and the carrier "will have to have turned over a new leaf if it's to make a success of this acquisition."

C&W's most notable acquisition cockups came in North America, where it splashed out more than $2.5 billion between 1998 and 2002 to buy MCI's IP network and hosting firms Digital Island and Exodus Communications. Those businesses were sold off for just $167.5 million in February this year (see Savvis Bulks Up).

— Ray Le Maistre, International Editor, Boardwatch

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