Global Crossing to Sell Local Phone Business to Citizens

After bulking up through acquisitions, Global Crossing Ltd. is streamlining operations through the nearly $4-billion sale of its U.S. local phone business and the possible divestiture of its Web-hosting business.

The Bermuda-based communications company, which has executive offices in Beverly Hills, announced Wednesday that it will sell its local phone holdings to Citizens Communications for $3.65 billion in cash.

Citizens, based in Stamford, Conn., has been beefing up its local phone business in the past few years and has also bought some assets from GTE Corp. and US West.

In addition, Global Crossing is considering selling its GlobalCenter Internet services subsidiary to rival Exodus Communications in a stock deal possibly worth more than $6 billion. Tentative terms of the pact would make Global Crossing a part-owner in Exodus and route much of that firm’s data traffic over Global Crossing lines, according to a person familiar with the discussions.

Global Crossing shares closed up $2.94 to $32.06 on Nasdaq, while Citizens’ stock rose 13 cents to close at $18.81 on the New York Stock Exchange. Exodus shares closed at $41.94, up $4.94 on Nasdaq.

One analyst noted that the sales could be perceived as a move to slim down Global Crossing for a sale, but most dismissed the idea that the deals would make the firm more of a target in the already merger-crazy phone business.

In addition, investors have long expected Global Crossing to shed the local phone business it acquired as part of its purchase of Frontier Corp. last year because it does not fit well with Global Crossing’s focus on business customers and data communications.

“That business was just a distraction for them . . . it’s not a fast-growing business, and not at all part of the mission of a Global Crossing,” said Roger Wery, who follows telecommunications for consulting firm PRTM in Mountain View.

Wery and others, however, say they were caught off guard by talk of a potential sale of the GlobalCenter subsidiary in Sunnyvale.

GlobalCenter is considered strategically important to Global Crossing because it can help the firm attract large corporate customers that want to hire a single company for both Internet-related services (such as hosting a firm’s Web site) and telecommunications connections.

In fact, most major telecommunications companies are rushing to build data centers and forge partnerships to get into the Web-hosting market, which is now considered an essential part of serving business customers.

GlobalCenter is one of the most advanced of the carrier-based businesses, with many customers and data centers already operating worldwide, Wery said. Exodus also is considered an industry leader.

Global Crossing plans to sell “tracking shares” in GlobalCenter in an offering that is expected to raise as much as $1 billion. If negotiations with Exodus pan out, Global Crossing would cancel the offering, sources said.

“Everything was on track for that to be a very well-received IPO, so this is surprising, to say the least,” Wery said. “But if there is a swap [of shares] and an ongoing ownership for Global Crossing, it may make a lot of sense.”

Trust Co. of the West, a major shareholder in Global Crossing, is confident that the telecommunications company would not entertain a deal with Exodus unless it could get some guarantee of ongoing business between the two firms.

That part of the deal would be critically important to Global Crossing, because it is anxious to fill up its vast transoceanic data network with customer traffic to lower overall system costs.

“From what I understand, this is not fully baked yet, but I think it would bring more customers online with [Global Crossing] faster with Exodus, and without having to spend the money on a huge [Internet services] sales force,” said Mark Attanasio, group managing director for Trust Co., which owns several million shares of Global Crossing stock.

In addition, Attanasio points out that Global Crossing could recoup the entire $10-billion purchase price of Frontier through the sale of just two components of that company--the local phone business and the GlobalCenter unit.

“That would mean that they basically got Frontier’s data networks and long-distance business for free,” Attanasio said.