RSL puts Canadian subsidiary on auction block; focus shifts to Europe, U.S. markets

Canada’s foreign ownership limits may be partly to blame for RSL Communications Ltd’s decision to put its Canadian subsidiary on the selling block. The New York-based parent announced July 17 that it would be pulling its operations out of Canada, Japan and Hong Kong in favour of more lucrative markets. It has hired the investment firm BMO Nesbitt Burns to help sell the Canadian division. The president of RSL Com Canada says part of the price of doing business in Canada is abiding by foreign ownership restrictions, which proved to be a major challenge to RSL. "It caused extra cost and it forced us to do some things from a corporate structuring point of view, which in turn led to extra cost," David Alsop told Network Letter. Telecom analyst Roberta Fox, of Toronto’s Fox-Hoey Consulting Inc, concurs, saying all telecom providers have been impeded by the rules. "The Canadian telcos have been hindered by lack of capital because of foreign ownership ," she says. "Most of the large venture caps are U.S. based and so we don’t have as much access to markets." She maintains this is a common problem in the industry. "They’re always saying it is a challenge getting enough money in Canada just because of access to capital. It tends to go to other things like resources and real estate and other places. It’s much easier for the telecom industry to get U.S. money except they’re hampered by the ownership." The small size of the Canadian market also appears to have been a factor in the parent company’s decision to concentrate its business elsewhere. "In simple terms," says Aslop, "I think the Canadian market is a small part of the total global opportunity that they’re trying to focus on, and they have decided for strategic reasons that they want to concentrate their focus on Europe and the USA." Ironically, hopes were high when the company began. Two years ago, RSL saw Canada as pivotal to creating an international telecom network. "Canada is the number one route of the U.S.," Itzhak Fisher, president and CEO of the parent firm told Network Letter at the time (NL, August 10/98). "If you want to be a serious global player, you have to have an operation in Canada." The parent company has taken a one-time, non-cash asset write-down of about $70 million that will be reflected as a charge in the Q2 earnings this year. The three operations on the block had annual revenues of around $76 million last year and are expected to have revenues of $36.6 million for the six months ending last June. A release from the firm said "substantially all of the revenue" came from the Canadian subsidiary. Unloading RSL Com Canada may be a hard sell. Alsop reports the company has been shopped around for the last three months. "There’s been a lot of contact," he says. "I wouldn’t characterize anything as active negotiations but certainly a lot of exploratory work has already been done." Fox doubts RSL will fetch a good price. "I took a look at the stock performance and it’s not too encouraging. It’s dropped tremendously the last six months," she explains. "It’s a tough marketplace out there right now in the competitive services space and managed services as well. There’s a lot of players in Canada in managed services." Headquartered in North Vancouver, RSL Com Canada operates in British Columbia, Alberta, Ontario and Quebec and has 265 employees in this country. Its major asset is the BC operations, formerly Westel Telecommunications. Initially owned by the British Columbia Railway Co, it was privatized in 1998 (NL, July 13/98). It was purchased by RSL, a company legally based in Bermuda but operated out of New York City. A partnership with MK Telecom Networks Inc created by Canadian telecom entrepreneur Michael Kedar kept foreign ownership thresholds at a legal limit. Kedar’s company owns the network transmission assets to comply with the Telecommunications Act. Fox says a new buyer will likely come from one of three distinct areas. "It may come from the cable market, the wireless market or the wired market. Because the wireless market is wanting to get into the wired market so it could be people like Rogers or Shaw wanting to get into wired. And then the cable market, as well, is wanting to get into local exchange and LD. And there could also be the traditional carriers, although the traditional carriers have a lot of their own facilities so they’d probably be the least favourable for buying, although they have the most money." She wonders if the new owner could be a smaller firm. Big companies already have the facilities in place and would only be interested in niche products that RSL offers, or in market share. She believes a smaller company would put in a bid in an attempt to become a mid-size player. It’s possible that RSL Com Canada could be sold in pieces, but that seems unlikely. "I think that would be a low percentage because we’re seeing more consolidation," Fox says. Alsop says the company plans to sell the Canadian operations as one unit.Fox stresses telecom companies are trying to build more of a national presence, discounting the possibility of a break up. There is the outside chance that Bell might be interested in establishing a western beachhead or Telus could bid on assets in eastern Canada. (Telus, in its BC Tel configuration, had attempted to buy Westel two years ago, but lost out to the American company.) "But that means they’ve got multiple buyers and can they successfully navigate multiple buyers?" she asks. "Is that what the board wants? That takes a lot of time and effort. Courting one buyer is hard enough, let alone multiples." Fox offers a couple of reasons for the failure of RSL Com Canada to do better in this marketplace. For one thing, it requires more of any investment than the parent company was willing to risk. It also fell victim to the large number of competitors out there at a time when customers are looking to simplify things. "The clients are very confused. And then the suppliers are coming out with niche products rather than broader portfolios of multiple products. So they may have specializations but clients are saying we want one company or two companies to deal with rather than 10, product by product." Alsop is hopeful new owners will be in place within three months. RSL has some residential LD accounts it inherited from Westel, but it is primarily focussed on the business market. That segment isn’t concerned with foreign ownership. "Corporate clients don’t really care who owns what," Fox states. "They want reliable services and advanced services. How the companies get the money to build and support what they need to do, it doesn’t much matter to most of them. That’s more of a consumer concern rather than a business concern."

RSL puts Canadian subsidiary on auction block; focus shifts to Europe, U.S. markets

News | July 31, 2000

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