LDDS to Buy Wiltel Network for $2.5 Billion in Cash Deal : Telecommunications: Firm could challenge AT&T;, MCI and Sprint if this and another purchase get regulatory OK.
LDDS Communications, an acquisitive and highly ambitious Jackson, Miss.-based phone company, took a giant step toward the telecommunications big leagues Monday when it agreed to buy long-distance carrier Wiltel Network Services for $2.5 billion in cash.
LDDS, which is 20%-owned by billionaire John Kluge, agreed earlier this month to buy Culver City-based IDB Communications for about $705 million in stock. If the two deals are consummated--both are subject to regulatory approval--LDDS would have annual revenue of more than $3 billion and about 5% of the nation’s $65-billion long-distance telephone market.
Such numbers would make LDDS an important challenger to AT&T;, MCI and Sprint, the Big Three of the long-distance business. Sprint, the smallest of the three, would still be double the size of LDDS, but the Mississippi company has pulled off some 35 mergers and acquisitions over the past eight years and shows no signs of stopping now.
“If you look at all the pieces and put them together, they rival any of the Big Three,” said Ryan James, an analyst at the Yankee Group, a Boston-based research company.
For Wiltel, a subsidiary of Williams Co., a Tulsa, Okla., energy firm, the sale marks the culmination of an extraordinarily successful foray into the communications business. In the mid-1980s the company began pulling fiber-optic communications lines through out-of-service natural gas pipelines, ultimately building an 11,000-mile network. Through a joint venture, Wiltel has access to another 30,000 miles of fiber-optic cable.
These facilities will be vital to LDDS as it tries to take on its bigger rivals. At the moment, LDDS has only 1,300 miles of its own cables, and relies heavily on leasing lines in bulk from firms such as MCI. The IDB purchase, for its part, gives LDDS satellite transmission facilities and a strong presence in international markets.
Earlier this summer, LDDS had offered $2 billion for Wiltel but was turned down. On Monday, Williams Co. said it had accepted a sweetened offer that includes the Wiltel phone business but not certain specialized network service operations.
Though LDDS said it plans to continue its strategy of growth through acquisition, some now say the company could itself become a target. Analysts suggest that British phone giant Cable & Wireless may find LDDS an attractive way into the U.S. market.
Phone companies from Britain, France and Germany have already bought chunks of Sprint and MCI. Electronic Data Systems, the General Motors subsidiary that recently came close to merging with Sprint, is another possible suitor.
When LDDS was formed in 1983, it was just one of hundreds of small companies that sought to exploit a long-distance market created by the breakup of AT&T;’s monopoly in 1984. But Chief Executive Bernard J. Ebbers--who moved to Jackson from Edmonton, Canada, to attend college on a basketball scholarship and then built up a successful motel business--took the helm in 1985 and immediately put the company on a rapid growth path.
A critical turning point came in 1992, when LDDS merged with ATC Corp. Although ATC had been widely expected to swallow the smaller LDDS, ATC’s share price had been battered by disclosures of unethical billing practices. Ebbers ended up managing the newly merged company.
Ebbers pulled another coup last year. He persuaded Kluge, who had set off on his own acquisition strategy by arranging a merger of a unit of his Metromedia Communications with another long-distance provider, Resurgens, to combine forces in a three-way merger with LDDS. Kluge got a controlling 20% share of LDDS, but Ebbers emerged as chief executive of the company.
Now with the IDB and Wiltel acquisitions, analysts said LDDS has the pieces it needs to be a major long-distance player. But James of the Yankee Group noted, “They are going to have to show they can run a company.” The spate of far-flung acquisitions makes it difficult to judge how well Ebbers has done at operations.
Although LDDS’ operating margins are an impressive 20%, higher than most of its competitors, analysts point out that LDDS will now have to spend heavily on marketing to fill the capacity of its newly acquired systems and become a full-fledged national player. LDDS is already baiting residential customers with 100 minutes of free long-distance calls for switching from a rival carrier.
