Persona takeover of Amtelecom fails as independent telcos consider options

The proposed acquisition of an Ontario independent telco by an Atlantic cable operator has collapsed at a time when the future of smaller ILECs is uncertain. But changes instituted by the CRTC could help the tiny telcos survive. Last summer, Regional Cablesystems Inc. of St. John’s NF (since renamed Persona Communications Inc.) made an offer for the telecom and cable business of Amtelecom Group Inc. of Aylmer ON. On March 6, the two sides announced the takeover had fallen through. "We thought the Regional deal made sense for both parties," Amtelecom president/CEO Stanley Stewart tells Network Letter. "It married up some networks that go all across northern Ontario and abut ours at Manitoulin Island and we could roll out some products they didn’t have like telephone and they could bring us some critical mass." The unsolicited offer from Persona initially came last August. Stewart reports there were about 10 issues that kept the two sides apart. While some headway was made over the course of the discussions, five topics remained contentious and two proved to be dealbreakers. (Despite repeated phone calls from Network Letter, Persona president Brendan Paddick was not available to comment on the collapse of the talks.) News releases put out by both parties indicate that the major stumbling block was Regional’s interpretation of CRTC Decision 2001-756, on the regulatory framework for small ILECs. In a December 21, 2001 statement, Regional claims "that certain historical revenue streams of Amtelecom Inc. were likely to be adversely impacted by the decision. Similarly, the CRTC decision reflected a clear intention of the CRTC to hold a proceeding in 2002 that could result in a subsequent decision that may further affect revenues from direct toll services provided by Amtelecom Inc. Regional also learned from other industry participants that they were considering an appeal of the CRTC decision." Stewart does not find the commission ruling to be as dire as Persona apparently does. "We thought the decision would be neutral-to-slightly-positive. We were impacted somewhat uniquely by the commission’s failure to address how they were going to deal with phone companies that had service improvement plans," he states. "We’re doing one of those plans at the behest of the government and they failed to take account of that in their mathematics. So we’ve had to go back in and say ‘hang on a sec, this decision, it’s silent on that issue, we don’t know where you stand’." Price cap regulation a boonAmtelecom is happy that the independents were shifted from return-on-capital regulation to the price cap regime. The companies will be permitted to use a proxy approach to determine subsidy requirements instead of costing studies. In addition, the commission set up a four-year transition period so the 39 ILECs can reduce the financial impact of the new contribution regime introduced in 2000.Stewart is a fan of the price cap regulation, and he expects it will help the telco’s bottom line. "Because of that, we can now put the utility-type debt directly on the balance sheet of the phone company and make it tax-deductible debt. That is certainly going to help our cash flow, as you can well imagine. In the previous regime, debt was not considered capital. So you couldn’t get a return on any debt that was on your balance sheet. Under the new regime, it’s irrelevant. As long as you’re within certain price caps, you can charge whatever you want." The situation is much the same for other small telcos. O.N. Telcom has been on the market for over a year, as the Ontario government proceeds with its plans to privatize certain Crown assets (NL, Feb. 26/01). The company has been receiving offers and should be ready to make a move within a few months. Vidéotron Télécom ltée., which is not subject to the conditions of Decision 2001-756, was put up for sale when cableco Le Groupe Vidéotron ltée. was taken over by media giant Quebecor Inc. But losses at the telecom division were so high Quebecor was unable to get its asking price. "Given the current market conditions, Quebecor Media Inc. has decided to retain Vidéotron Telecom in its portfolio of assets, to make it as profitable as possible and to integrate it in its convergence strategy," Quebecor VP Luc Lavoie emailed Network Letter. "Since we replaced the management team a year ago, Vidéotron Telecom has undertaken a complete turnaround. In less than 12 months, it has gone from a near bankrupt entity to a profitable one with expectations of 30 per cent growth a year for the foreseeable future." Circumstances have forced the smaller telecom players to re-examine their strategies, one consultant believes. Roberta Fox, president of Fox Group Consulting Inc., notices the market has lost its appetite for telecom takeovers. "Wall Street, Bay Street, Hong Kong, whichever investment markets you want to look at, are not investing in telecom to the extent that they used to," she tells Network Letter. "And so a lot of the offers have been withdrawn because the capital behind the scenes hasn’t been made available." That results in the telcos seeking money from other places. "O.N. Tel would have a hard time building high-speed services if they can’t get the capital but maybe they’d get it locally from local investors," Fox speculates. "They might take it to a bond or they could do a municipal bond. If they tried to go to the large houses for funds they’re going to be competing against the large guys." One solution she does find far-fetched is the takeover of the small ILECs by larger incumbents such as Bell Canada or Telus Corp. They have their own fiscal responsibilities that preclude such venturing."With the capex crunch? I don’t think so. I think it’s unlikely," she offers. "I’m not saying it’s an absolute no, but I think it’s unlikely. Unless there’s some network-enabled application that’s going to be serviced in those areas that’s going to drive the need for speed, then I can’t see why the ILECs or the second-tier carriers would do that." Fox is in sync with Amtelecom’s Stewart. The collapse of the Persona deal has led his company to recommit itself to providing the best service it can. He does not rule out a sell-off or merger at some time down the road. "Obviously if that same kind of an opportunity presented itself you’d be kind of pigheaded not to look at it, but I’m unaware if whether that exists," he says. "And we’re not in conversation with anybody at this time."

Persona takeover of Amtelecom fails as independent telcos consider options

News | March 12, 2002

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