Infonet Reveals Big Appetite for Acquisition in Bid for Equant

Until this week, El Segundo-based Infonet Services Corp. was a small but growing player in the burgeoning data communications industry, better known overseas than in the United States. But the company’s bid to buy European rival Equant, a much larger competitor, for as much as $9 billion, has dramatically raised its profile.

Infonet, spun off from Computer Sciences Corp. in 1988, carries critical data traffic for some of the world’s largest companies and booked $481 million in fiscal 2000 sales. It competes against the likes of AT&T;, British Telecom, WorldCom and other better-known firms.

The company is flush with cash from two recent offerings that it plans to use to continue to grow. Late last year, Infonet raised $250 million in a debt offering and followed that up with an initial public offering of its stock that raised $1 billion--among the largest IPOs in Southland history.

The attraction for many investors was the company’s solid corporate customer base, nearly 2,500 big names, including Nokia, Nestle, Allergan and Volkswagen. Investors also were eyeing the fast-growing demand for high-end Internet, data networking and worldwide broadband connections among international corporations.

Now more than ever, large companies want someone else to set up and manage their Web sites, connect their far-off affiliates and give employees fast global access to the Internet as well as internal company systems.

For instance, when advertising giant Saatchi & Saatchi needed a way for its offices around the world to share ideas and materials, Infonet developed a Web-based system that allows workers to swap electronic files rapidly and securely.

The overall market for such services is expected to grow to $27 billion next year. Infonet’s focus is on a group of services called “cross-border managed data communications”--a murky name but a market segment that will grow to $15 billion worldwide by 2003, according to estimates from the research firm IDC.

Despite the promise of its business, Infonet’s stock price is lagging badly along with the shares of its peers. After debuting at $21 in December and hitting $33 in March, Infonet fell to a low of $9.56 in late May. It closed Friday at $14.94, up 56 cents in New York Stock Exchange trading, but down 43% for the year.

Infonet also is still is struggling to be consistently profitable, having lost $26.7 million in the year ended March 31.

Company officials, who this week declined to comment on reports of its talks with Equant, also declined to be interviewed for this report. But the company is winning high marks from industry analysts for the efficient way it is building its business.

“They are definitely on the radar screen of the other carriers, and there is an astonishment that they are achieving such a commercial success and such credibility without building its own network,” said Roger Wery, a director at PRTM, a Mountain View, Calif.-based technology consulting firm. “But while the other guys were focused on building their own network, these guys were focused on developing commercial relationships and delivering high-end business applications.”

Infonet has not built its own communications network in the traditional sense. Instead of laying fiber-optic lines, Infonet has been buying or leasing the fiber capacity it needs from other carriers such as Williams Communications.

In other countries, Infonet has partnered with the existing phone companies, building close ties and piggybacking on their lines to court corporate clients.

As part of those partnership agreements, many phone firms were granted shares of Infonet, including KDD Corp. of Japan, KPN Telecom in the Netherlands, Swisscom in Switzerland, Telefonica International Holding of Spain, Telia of Sweden and Australia’s Telstra Corp. Together, the phone companies have voting control over 97% of Infonet’s shares.

In recent months, Infonet signed significant deals with Texas-based SBC Communications (to sell Infonet services in the United States) and with Germany’s Deutsche Telekom for additional international sales. The deals are expected to generate a combined $2 billion in sales over five years, according to an August report by Robert Pomeroy, an analyst at Goldman Sachs.

Wall Street is expecting Infonet to turn a profit of $54 million in the current fiscal year.

Equant is double the size of Infonet (about $1 billion in 1999 sales), and has taken a similar approach to the business, opting to lease and buy fiber-optic lines from companies building the networks.

The market value of Equant is around $9 billion compared with nearly $7 billion for Infonet. But both companies are evolving. Equant and Infonet are now working toward owning a greater share of their respective networks. Infonet will spend $650 million to add capacity over the next three years.

Global Crossing, Level 3, KPNQwest and other rivals are spending millions to build their own lines and connections, betting that owning the fiber-optic lines will give them an edge if the availability of bandwidth tightens in the coming years.

Telecommunications analyst Wery of PRTM says Infonet’s partnering strategy has worked well overseas, especially because foreign companies still are largely restricted from installing their own lines.

“In today’s competitive market they can find cheap bandwidth [to buy and lease],” Wery said. “And they have that historical feet-on-the-street experience overseas, and they have been writing big checks to those telecommunications companies for many, many years and developed relationships with them.”

A combined Infonet and Equant, he added, “would be the biggest, most global and potentially the most desirable enterprise-focused service provider . . . and it would have a very compelling value proposition, assuming that they can continue to acquire cheap bandwidth.”

Then again, if bandwidth grows scarce, either or both of the companies could join forces with a network company such as Global Crossing.