Train wreck. Meltdown. Disaster. Words almost fail to capture the magnitude of what has happened to Teleglobe, the former government monopoly that BCE paid $6.4-billion for just over two years ago. By cutting off its support last month, BCE effectively admitted the $6.4-billion had gone up in flames - and by filing for bankruptcy protection, Teleglobe has admitted it lacks the ability to pay most of the debt it racked up in its attempt to become a global telecom player.
Former BCE chief executive Jean Monty stepped down largely because of BCE's disastrous experience with Teleglobe, perhaps in part so that hostile creditors could have a scapegoat for their anger at losing 80 per cent or more of the $4-billion they are owed. After all, it was Mr. Monty who said at an investors meeting just six months ago that BCE was still committed to continuing its financial support of Teleglobe.
To the bitter end, Mr. Monty defended his purchase of Teleglobe - a purchase which over the past year has helped dragged BCE's stock to below $25 from $45, erasing $16-billion in market value. After the acquisition was announced in early 2000, Mr. Monty said that it would help push the telecom company's stock above the $70 level by the end of 2001. Instead, the only boost it provided was when BCE said it was cutting off support for the debt-riddled unit, at which point the stock rose 20 per cent.
It may not be much consolation for the bondholders and shareholders who have seen their investment go up in flames, but Teleglobe has plenty of company in the bankrupt telecom section of the market's critical care ward - in fact, it's getting so crowded they may have to add a new wing. Companies like Winstar and 360networks filed last year, followed by Global Crossing earlier this year, and Williams Communications filed for protection several weeks ago.
All these companies, big and small, effectively bet the farm that demand for telecom services would rise exponentially, thanks to increasing Internet traffic, streaming video, interactive television and other services. They bet that this demand would fill the massive bundles of fibre-optic cables they were busy laying down every street and along every railway track and underneath the ocean from North America to Europe. And they were making those bets, of course, with billions in borrowed money.
In that sense, Teleglobe didn't do anything that dozens of other companies weren't also doing, and Mr. Monty's global telecom strategy seemed quite sound to many, having seen the heartwarming reception given to a similar venture like Global Crossing. But there were a few things that virtually ensured Teleglobe's eventual downfall - things for which Mr. Monty bears more than a little responsibility: one was that Teleglobe was late to the party, another was the fact that that it was already in trouble when BCE bought control, and a third was Excel Communications.
When BCE said it was buying the 77 per cent of Teleglobe it didn't already own for $7.4-billion, Teleglobe was already seen as a troubled franchise. It was trying to find a way of not just surviving but growing in a hotly competitive telecom market, one in which the fat long-distance profit margins it had always relied on were whittled away. If nothing else, a light bulb should have gone on when BCE had to agree to pump $1-billion into the company just to keep its bankers from turning off the taps.
That was while the acquisition was being completed, and BCE cut the price it was paying to $6.4-billion - but still, Mr. Monty maintained that with BCE's help, Teleglobe's growth strategy would work. Never mind that it was the same strategy half a dozen other companies were also embarked on. In that sense, Teleglobe was a sinking ship from day one. In fact, it had been listing for some time, thanks to another ill-conceived deal: the $4.6-billion purchase of Excel Communications in 1998, one Teleglobe CEO Charles Sirois made with the approval of his friend and board member Mr. Monty.
The acquisition of Excel didn't make much sense to many analysts when it was made, and it made even less sense when BCE bought all of Teleglobe in 2000. Excel captured the spotlight briefly in the mid-1990s when it applied an Amway-style, multi-level marketing approach to the long distance telephone business, but this strategy never really paid off. BCE bought it along with Teleglobe, only to sell it later for just $227-million (U.S.) - 90 per cent less than it paid for it - taking a huge writeoff.
The debt that Excel had racked up got added to the immense pile that Teleglobe already had, a pile that loomed over the company's head like the sword of Damocles. Mr. Monty assured bondholders and shareholders that BCE stood behind the company and was committed to supporting it financially - right up until he announced that it wasn't. And now Teleglobe is another telecom carcass for debtholders to fight over.
E-mail Mathew Ingram at mingram@globeandmail.ca
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