Executives share rationale for KMTS-Bell Aliant merger: Q&A Part I

Pending competition from cablecos and the prospect of seeing red ink within three to five years are among the main reasons Kenora Municipal Telephone System (KMTS) started merger talks with a Bell Canada subsidiary about 18 months ago, say executives with both companies. This month, the CRTC approved the acquisition - signaling the end of another municipally owned telco. Dennis McCaffrey, GM of KMTS, stresses that the Northern Ontario company was in strong financial position but that was likely to change once cablecos entered the telephone market. KMTS has about 10,000 local landline customers with revenue between $10 million and $15 million. It has about 8,000 cellular customers and 4,000 Internet customers on DSL, dial-up and broadband wireless. Residential local telephony rates are among the lowest in the country at about $20 per month and McCaffrey asserts that its business local service is the lowest in the country at $31 per month. "I think it's important to understand that it's not as if we were suffering financially or on the rope," he tells Network Letter. KMTS had a good ride over its 100 years as a municipal telephone company, but times were changing. "What we saw when we looked ahead was quite a different picture," he says. If the company was to remain sustainable over the long term, it had to be proactive and find a buyer. KMTS' fears were confirmed by independent analysts from the SeaBoard Group which predicted that KMTS wouldn't be making a profit within three to five years. This cemented the belief that KMTS needed new ownership: the cautiousness and non-risk taking nature of a municipally owned telecom company wasn't going to succeed in the new reality of a competitive market. After a process that was kicked off three years ago, the purchase of KMTS by Bell Aliant Regional Communications was blessed with final approval from the CRTC on February 1. Below is an edited excerpt of an interview with McCaffrey and Mark Hanlon, Bell Aliant's senior VP and COO Ontario. Part II will appear next week. Network Letter: Talk about some of the reasons behind the acquisition? Dennis McCaffrey: We started the process about three years ago and we were looking at the trends in the three-, five- and 10-year timeframe and what we saw in terms of changing regulatory situation, changing technologies, changing competitive situation was quite a different picture. We knew our local monopoly was about to end which it did last year and we knew that the cable companies that hadn't yet got into the telephone business would and that seems to be unfolding. Once Bell Aliant was spun off and knowing its focus is the smaller cities and rural areas, we believed that they would act very quickly along with others would be out to put us off the map. But when we looked and saw all these trends around the corner, we convinced ourselves we had to do something quite different and we believed we needed a new owner that had the things we needed on a going forward basis. A little more than a year ago we received approval to proceed with an RFP where we would go out to the usual suspects to solicit bids. In the RFP we had three criteria: price, a commitment to retain jobs in the community, commitment from buyer to have a regional presence and ideally keep the KMTS brand. We received bids from five companies, but we picked Bell Aliant because they were the best fit for what we were looking for in the future. NL: What were some of those things? Economies of scale and larger size to be able to decrease costs and compete in a much more competitive market? DM: Absolutely as well as spectrum for services that we don't have such as WiMAX and advanced communications services. Content is another huge element because nobody our size can economically get their hands on any content. To be able to compete with the cable companies we were going to need access to content. As well, a different management approach that comes with private ownership was critical. One that is bottom line driven, moves quickly and is prepared to take risks where it makes sense is what we believed we'd have to do. NL: From Bell Aliant's perspective, does the acquisition of KMTS represent a key part of its growth strategy? Mark Hanlon: The acquisition of KMTS really doesn't make Bell Aliant that much larger, but there is a lot of benefit in the northwestern Ontario area from this acquisition. We have a presence there and have had for a long time, but bringing the field forces together gives both organizations the opportunity to deal with peaks and valleys of a competitive market that were never there before. We bring competency on how to deal with small and remote territories and customer sets. Dennis and his team understand exactly how to serve customers in that territory and we can learn from each other. NL: Did Bell Aliant need to buy KMTS or was the deal too good to pass on? MH: KMTS approached us from the very beginning of Bell Aliant in July 2006. We felt there were opportunities for us to be a consolidator in the regional telecom market space. This fit that strategy very well. And so we seized the opportunity and carried down the path with KMTS. NL: You talked about being a consolidator in this space. Are there other companies on the radar screen? MH: I couldn't comment on that directly. We're always looking for good solid business opportunities to help us grow our business. NL: Did Bell Aliant lose out in not getting Amtelecom when it was acquired as part of the Persona and EastLink deal? MH: We saw opportunity there. We made what we believe was a fair offer and we got out bid. Those are the dynamics of the market space.

Executives share rationale for KMTS-Bell Aliant merger: Q&A Part I

News | February 28, 2008

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Executives share rationale for KMTS-Bell Aliant merger: Q&A Part I

News | February 28, 2008

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