Monday, November 5, 2001

Reston firm Teleglobe Inc. faces the same woes as other companies in the telecommunications industry. But unlike the competition, Chief Executive Officer Terry Jarman can still look north to his parent company for solace.

The conglomerate Bell Canada Enterprises (BCE) of Montreal has owned all of Teleglobe since last year, and the relationship is paying off now that times are tough.

“They’re wedded to [Teleglobe] as a strategic initiative,” says Mr. Jarman, who has run the company since April 2000.

In an interview with The Washington Times, Mr. Jarman stresses that BCE is determined to keep afloat its U.S. subsidiary, which owns a worldwide fiber optic and satellite network for data and voice communications.

Fortunately for Mr. Jarman and Teleglobe’s roughly 700 employees in Northern Virginia, BCE can put its money where its mouth is.

BCE is trying to remake itself as a modern, global telecommunications company, but it still relies on Bell Canada, the longtime Canadian monopoly that makes simple telephone calls, for 76 percent of its $5.4 billion in revenue last quarter. It is, in short, the cash cow that makes Teleglobe’s management breathe easier.

“Bell Canada’s success has been very much depended on,” BCE’s Chief Executive Jean Monty conceded in a recent conference call.

Teleglobe’s business is providing “connectivity,” as the industry jargon goes, to big clients who sell services to customers. The services include intra-company networks, Internet access and Web hosting. The clients include giants like DaimlerChrysler, and Spain’s Telefonica, a former state monopoly.

The company, which BCE originally envisioned as a fast-growing revenue source, has had its share of missteps. In 1998, it acquired Excel Communications, the fifth-largest U.S. long-distance carrier, for $3.1 billion. That investment quickly went south, and BCE unloaded the company at a loss this year.

The frenzied, euphoric period is over, but Mr. Jarman, convinced that the demand for broadband services will rise for decades to come, is trying to maintain a stiff upper lip.

“I liken it to the 19th-century gold rush,” he says. “There’s no denying that there’s gold there.”

Mr. Jarman, a 20-year veteran of BCE who has helped run Bell Canada and a cable television venture in Europe, still has his hands full coping with a worldwide economic slowdown that has bit into business all around the world, and claimed many casualties in the telecommunications industry.

Its Canadian competitor 360 Networks is grappling with bankruptcy proceedings, and other giants of the industry, like Broadwing, Qwest and Global Crossing are trying to weather the storm.

Financial markets, eyeing the money Teleglobe will need to build out its network and draw in new customers, still see the company as the albatross around BCE’s neck.

“Teleglobe is the major risk component to BCE’s stock right now,” says Greg MacDonald, an analyst with Morgan Stanley in Toronto.

Teleglobe, like its competitors, is losing money at a fast clip as it struggles to build out its network and draw in new customers even in a weak economy.

In the third quarter of this year, Teleglobe lost $14 million on revenues of $491 million. That figure is down from $542 million in the second quarter, when the company began feeling the full force of a weaker world economy.

“The first thing we saw was dramatic price drops,” Mr. Jarman says. He attributes this “uneconomic behavior” to weaker competitors who were trying to boost revenues, even as they sold telecommunications services at desperately low prices.

By early in the year, Teleglobe was revamping the budget that BCE’s board of directors had just approved. It slashed a $5 billion capital investment plan what Mr. Jarman calls a “build-it-and-they-will-come” idea by 40 percent in February, and by another 15 percent in August.

Then came the layoffs. It jettisoned 20 percent of its staff roughly 450 employees in August.

Next year, Teleglobe, which landed in Northern Virginia in 1995 as Bell Canada’s subsidiary for international telephone calls, will face a cash crunch. It needs about $750 million to complete its network, and to cover operating costs until it can break even, perhaps by late next year, Mr. Jarman says.

BCE is likely to provide about $500 million of that capital, and Mr. Jarman says the company has been approached by private investors who are likely to provide the additional $250 million.

But the key to increasing Teleglobe’s revenue at a time when the prices for telecommunications services are very weak lies with its competitors. They need to go bankrupt, or exit the business.

“The company that can survive this painful process ought to be able to prosper,” Mr. Jarman says.

With BCE’s support, Teleglobe should be able to manage the transition, analysts say.

“Teleglobe has actually been in a pretty opportune position,” Mr. MacDonald says.

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