TeleGlobe/ITXC Contends for Wholesale Heavyweight Title

AT&T Corp., France Telecom and Global Crossing Ltd. and MCI are among the telecom companies now facing a new rival in the wholesale international voice business. Teleglobe International Holdings Ltd., of Montreal acquired ITXC Corp., the company specializing in routing Internet voice traffic internationally, including to and from developing countries. The combined company carried about 11.8 billion minutes of voice traffic in 2003, with Teleglobe hauling the bigger load.

ITXC, of Princeton, N.J., estimates it carries about 15 percent of all international calls transported over the Internet, with arrangements to originate and terminate traffic in 232 countries and territories as of the end of last year. The company reports carrying traffic to and from at least 100 countries on a typical day.

Stephan Beckert, research director of the TeleGeography research division of PriMetrica Inc., says the combined company likely ranks among the five biggest wholesale voice carriers in the world.

Beckert says he cannot pinpoint an exact ranking. Based on 2002 data TeleGeography compiled, MCI and AT&T routed the most voice traffic around the world. “I don’t think it [the ITXC acquisition] fundamentally changes the dynamics of the business or will dramatically hurt their competitors,” Beckert says. “I don’t see that [it] is going to change the landscape fundamentally.”

Teleglobe says it is competing in the voice market with most international PTTs, such as Belgacom SA and France Telecom, and global providers, including AT&T, MCI, IDT Corp., Sprint Corp., Global Crossing, and emerging carriers in deregulated markets.

In a research note Annelise Berendt, senior analyst with Ovum, writes, the ITXC acquisition “certainly creates a major force in international wholesale, with the new entity effectively becoming the third largest carrier of international voice traffic, and certainly the only dedicated wholesale player in the top 10.”

Analysts say Teleglobe gains a key network component through the ITXC acquisition: a voice-over-IP platform used to route a growing number of phone calls over the Internet. Executives of ITXC and Teleglobe say the combined Teleglobe will have the scale to provide telecom providers better rates and develop partnerships with local phone companies deeper into developing countries such as Columbia over ITXC’s VoIP network.

Low rates and cutthroat competition have characterized the wholesale voice market for years, but ITXC and Teleglobe say the rate of decline is beginning to abate: An industry survey of retail pricing indicated prices for the international voice transport and capacity market fell by 17 percent between 2000 and 2001, 20 percent between 2001 and 2002 and 5 percent between 2002 and 2003, according to the companies in a filing with the Securities & Exchange Commission.

The downward pressure on rates in the voice market is still “absolutely brutal,” Beckert says. “That’s why volume matters.” Beyond its voice business, Teleglobe also sells data services, including IP transit; and such value-added services as mobile global roaming, signaling and messaging services for wireless carriers. In its data and Internet business, Teleglobe lists as principal competitors Cable & Wireless plc, Level 3 Communications Inc., MCI, NTT/VERIO and Sprint.

Carriers represent Teleglobe’s largest customer market, while ISPs and resellers are its fastest growing segments, according to a proxy statement filed with the SEC on the proposed acquisition of ITXC. Sales to Bell Canada, Teleglobe’s largest customer, represented 19.6 percent of pro forma revenue for the year ending Dec. 31, 2003.

Teleglobe has roots dating back to 1950 with the government-owned Canadian Overseas Telecommunications Corp. In 1987, the government privatized Teleglobe Canada Inc. Thirteen years later, BCE Inc. acquired Teleglobe, shelling out approximately $1.8 billion between late 2000 and the second quarter of 2002 to build an integrated voice, data and Internet network, according to the proxy statement.

In April 2002, amid record turmoil in the telecom industry, BCE announced plans to withdraw financial support from Teleglobe. A month later, Teleglobe filed for bankruptcy. Two U.S. investment firms - the affiliates of New York-based Cerberus Capital Management L.P. and Philadelphia-based TenX Capital Partners LLC - acquired bankrupt Teleglobe for $125 million.

Teleglobe, a privately held company prior to completing the ITXC acquisition, reported 2003 pro forma consolidated revenue of $856.4 million, according to the proxy statement.

For the 2003 fiscal year, ITXC posted revenue of $338.4 million, with a net loss of $50.5 million. The companies posted a combined net loss of $53.2 million, according to the proxy statement.

ITXC Corp. founder and CEO Tom Evslin has been named Teleglobe’s non-executive chairman of the board. Shares of Teleglobe trade on the Nasdaq under the ticker symbol TLGB.

Vital Stats
Combined, Teleglobe and ITXC:

• carried approximately 11.8 billion minutes of voice traffic in 2003.
• counted Bell Canada, MCI, IDT, TelcoGroup Inc. and Verizon Communications Inc. as its top five customers by revenue – cumulatively bringing in about 30 percent of the carrier’s revenue on a pro forma basis for the 12 months ending Dec. 31, 2003.
• own network PoPs with reach to approximately 240 countries and territories, ownership interests in more than 100 subsea and terrestrial cable systems and 48 Internet PoPs in 15 countries, among other assets.
• reported 2003 revenue of approximately $1.18 billion and a net loss of $53.2 million, according to a filing with the SEC.