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The Concert No Longer Plays
By Scott B. MacDonald
During a recession companies usually undergo restructurings designed to provide cost efficiency and reduce debt burdens. Although painful, such actions are critical if companies are to rebound when the recession ends and the economy rebounds. The telecom industry clearly reflects this process. As debt was accumulated with considerable gusto throughout the telecom universe (and credit was cheap and in ready supply), deleveraging is now advancing with equal fervor since most corporate heads recognize that the good times are over. In this light, AT&T (T), one of North Americas major telecom companies, and British Telecom (BTE), one of Europes major telecom players, decided to end Concert, a 50/50 joint venture.
Two years ago, AT&T and British Telecom (BT) created Concert, which was to provide multinational companies with a single global telecom service. Concert, however, proved unable to hit the right notes and the company became a financial drain for both AT&T and BT at a time when they were themselves confronted with difficult market conditions and internal restructurings. Complicating matters further, Concert ended up competing with its parents. According to a number of Wall Street analysts, losses this year were set to hit $800 million.
After months of negotiation, AT&T and BT agreed that AT&T will take a total of $5.3 billion in charges (against 3Q01 earnings) in two parts. This includes a $3.5 billion charge related to the unwinding of Concert and the assumption of BTs interest in AT&T Canada (ATTC) and a $1.8 billion charge related to AT&Ts stake in ATTC. These are non-cash charges. Finally, it appears the value of ATTC is being written down to $1.2 billion from $3 billion. BT said the break-up would lead to a 1.2 billion pound ($1.7 billion) charge, plus a further 200 million pounds to cover its share of redundancy and unwinding costs.
The partners will divide Concert's working capital between them, with BT receiving an additional $400 million to reflect the allocation of business to the venture. BT said that extra money effectively covered $180 million of annual losses for two years at the parts of Concert it will reclaim.
BT and AT&T will take back most of the parts of Concert they originally contributed. However, there will be a net loss of jobs as there will be no jobs at the parent companies for 2,300 of Concert's 6,300 employees. About 800 to 1,000 of the job cuts will fall in the UK, with the rest in the United States.
The end of Concert has important ramifications for the Canadian telecom market. AT&T will take full ownership of the joint venture through which it and BT own stakes in AT&T Canada. AT&T, therefore, takes on BT's share of the venture's obligation to buy publicly traded shares in the Canadian company by June 30, 2003, which would have cost BT 725 million pounds. This also means that ATTC will be a more competitive player in the Canadian telecom market, something that the British Columbia-based Telus (TU) will have to consider in its drive to be the North American countrys major provider.
The end of Concert is an important millstone in the restructuring of the international telecom industry. For BTE, the end of Concert is the final stage in an ambitious restructuring and clears the decks for it to split into separate fixed-line and mobile telephone businesses next month. AT&T is taking similar steps to separate its major divisions. It indicates that major telecom companies have reassessed the strategic realities in todays markets and are willing to cut their losses. As BT Chief Executive Peter Bonfield said on a conference call "If we can reduce the cost of operations, this business should be able to return to profit within two years,"
For both BT and AT&T the exit from Concert is one step of many that these companies need to make to restructure their operations and develop better business models. Following the sale of Concert, both Moodys and Standard & Poor's moved to downgrade AT&T from its A2/A ratings to A3/A-.