MCI to sell off Internet backbone; deal may assuage antitrust concerns U.K.'s Cable & Wireless becomes a major player in U.S. market By Kristi Essick

June  1998

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Under the terms of the agreement, Cable & Wireless will purchase MCI's entire Internet backbone and ISP service for $625 million in cash, giving it a huge leg up in the U.S. Internet traffic market. The two companies also said the deal addresses some of the possible antitrust issues in the proposed MCI-WorldCom merger, which is currently being scrutinized by the U.S. Department of Justice (DOJ) and the European Commission.

If last week's deal receives government approval, it should clear the way for the MCI-WorldCom merger to take place, the companies said in a statement. They could be right. Many of the officials' concerns have been centered on the fact that a unified MCI-WorldCom would be too dominant in the Internet backbone market.

The investigation into the merger will continue, said DOJ spokeswoman Gina Talamona, but in the course of reviewing the WorldCom-MCI deal "obviously, we will look at this (backbone business sale), too."

The European Commission also intends to pursue its investigation, scrutinizing now what overlap in services might remain between WorldCom and MCI, said Stefan Rating, spokesman for European Competition Commissioner Karel Van Miert.

Although WorldCom contends that any major telco can compete to offer long-distance Internet transmission services, Rating said in fact there are only four large suppliers of such services. If the proposed deal with Cable & Wireless does not eliminate overlap in that market, WorldCom and MCI might have to make additional concessions to win approval, Rating said.

"The deal may be part of the solution, but it is not yet clear that it answers all our concerns," Rating said.

While the DOJ and the European Commission continue scrutinizing the WorldCom-MCI merger, analysts on both sides of the Atlantic see MCI's Internet backbone sale as a shrewd move.

"It's definitely a really smart move," said Christopher Cho, mergers and acquisition analyst at market researcher Atlantic-ACM in Boston. "The combined WorldCom-MCI Internet business was probably the major regulatory hurdle that they faced."

Deal "almost too good" for Cable & Wireless
The proposed sale of MCI's backbone business also is "a great deal for Cable & Wireless," he said.

"Almost too good" for Cable & Wireless was how London-based analyst Andrew Doyle put it.

"MCI must be so anxious to push the MCI-Worldcom deal through that they were willing to take a hit on the price," said Doyle, an analyst for International Data Corp.

From the Cable & Wireless perspective, the deal presents an opportunity to make inroads in the U.S.

"It takes us in one move into a leading position in the U.S. Internet market, which is growing phenomenally quickly," said Peter Eustace, Cable & Wireless spokesman. Cable & Wireless will become one of the top five Internet carriers in the U.S., he said.

Some details of the arrangement are complicated. Although the acquisition covers only MCI's wholesale ISP (Internet service provider) business, traffic from its non-ISP Internet customers will pass over the Cable & Wireless backbone for at least two years. So, Eustace said, if MCI offers voice and Internet services to a large corporation, it will essentially offer those services via the Cable & Wireless backbone as a Cable & Wireless customer.

Conversely, MCI will be the sole carrier of underlying Internet traffic on the Cable & Wireless backbone for two years because the backbone essentially exists within MCI's telecommunications network. At the end of two years, Cable & Wireless can move the traffic to its own network and ink deals with other telcos to carrying underlying traffic, Eustace said. By the end of three years, that transition will be complete.

$600 million investment planned
To build its U.S. network, Cable & Wireless will spend $600 million over the next three years on new infrastructure. If the network has holes at that point, the company could use MCI, AT&T Corp., GTE Corp., or another provider to carry portions of underlying Internet traffic that pass over its backbone. However, Eustace said Cable & Wireless will do all it can to have the majority of its traffic traveling on its own network by 2001.

"Our prime concern will be to build up our own network," he said.

MCI's Internet backbone consists of 22 U.S. nodes, 15,000 interconnection ports, 40 ongoing peering agreements, and the equipment that supports the network, such as routers and switches. Cable & Wireless will acquire this entire network and will take over MCI's 1,300 existing contracts with ISPs (Internet service providers), Cable & Wireless said. The U.K. telco will also take on certain MCI personnel who currently work on the operation of the MCI backbone, including engineers, support staff, and sales and marketing employees.

Cable & Wireless said it is keen to focus more of its energies on the global Internet market, which is growing more than 50 percent a year on average, the company said. MCI's backbone is one of the largest in the U.S. and will allow Cable & Wireless to tap into the lucrative Internet and data traffic carriers market there, officials said. Already, the company's U.S. business, Cable & Wireless Inc., serves about 100,000 business customers with voice, data, and Internet services. MCI's Internet backbone and ISP service business has projected revenues of approximately $220 million for the 12 months to December 31, 1998.

MCI and Cable & Wireless expect the deal to be completed in August at the same time as the MCI-WorldCom merger, provided it receives the necessary approval from the Department of Justice and the European Commission, the companies said.

Kristi Essick is a correspondent with the IDG News Service. Nancy Weil and Elizabeth de Bony of the IDG News Service contributed to this report.

Resources

• MCI http://www.mci.com
• Cable & Wireless http://www.cwplc.com/

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