The Canadian competitive telecommunications market has witnessed at least a dozen significant failures since the global downturn in the sector. The three biggest competitors, AT&T Canada, GT Group Telecom and Sprint Canada have been on a “death watch” for the past year, due to massive debt levels and continuing operational losses. After trimming its money losing operations last fall, Sprint Canada has now broken away from its peers in a massive restructuring of its $2 Billion debt.
Background
In one of Canada’s largest and most disasterous corporate transactions, Sprint Canada’s parent – Call-Net Enterprises – acquired Fonorola for almost $2B in cash and stock in the middle of 1998. Most of Fonorola’s revenue base dissolved within months of being integrated into Sprint Canada and the remaining “goodwill” from the transaction was written off the books in closing out the 2001 year end.
Since 1999, the company has been operating in a retrenchment mode, shedding lines of business, money losing customers, and focussing its efforts on being a smaller, but profitable company.
Debt Restructuring
Call-Net has now announced that it has negotiated a comprehensive recapitalization plan with its major holders of debt and shares that would reduce Call-Net’s debt by more than $2 billion. More than half the debtholders and almost 40% of shareholders have expressed support for the plan. Under the plan, current shareholders will retain only 20% of the company’s equity and shares are to be consolidated on a 20:1 basis.
Regulatory Help
As reported in earlier analysis reports, the CRTC has provided certain amounts of relief, contributing hundreds of millions of dollars in financial adjustments to the complex system of cross-subsidies and payments from competitors to incumbents. In fact, more relief is expected in the coming months as the CRTC completes deliberations in its recent Price Cap proceeding.
Summary
While existing shareholders now have a significantly smaller piece of the Call-Net pie, they are now able to look at more than an empty plate. By cleaning up its balance sheet, Call-Net is far better positioned to successfully compete. If the CRTC continues to provide regulatory relief in the coming months, watch for Sprint Canada and Call-Net to thrive – it now appears certain to be one of the survivors.