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VarTec-Lightyear deal off

Jeff Bounds
Dallas Business Journal

NORTH DALLAS -- VarTec Telecom Inc., one of the country's largest privately held phone companies, has quietly shelved plans for a merger with Kentucky-based Lightyear Communications Inc. that would have created a firm with $1.5 billion in sales and 2,100 employees nationwide.

Neither Dallas-based VarTec nor Lightyear Communications of Louisville will say much about the demise of the deal, which was publicly announced in January 2001.

In an e-mail response to written questions, however, VarTec said that by December 2001, it became apparent that unspecified "necessary and important conditions required in order to consummate the deal were not likely attainable and, as a result, stalled the merger negotiations between the companies."

"The financial markets currently just make it a situation where going forward doesn't make sense," Henry Hunt, senior vice president of sales and marketing at Lightyear, told Business First of Louisville, an affiliated publication.

But VarTec contends that raising money for the deal wasn't an issue.

Despite the collapse of the Lightyear deal, VarTec says it is proceeding with plans to buy the North American operations of Dallas-based Excel Communications from BCE Inc., Canada's largest phone company.

"The sale of Excel to VarTec is very much on," says a spokesman for BCE, which is based in Montreal. "We anticipate the deal will close prior to the end of the first quarter," or by March 31.

VarTec stresses that the Excel transaction is separate from and unrelated to the Lightyear deal.

VarTec will be getting Excel for a fire-sale price -- about $250 million -- at least compared to the $3.5 billion that Excel fetched when it was sold to Montreal-based Teleglobe Inc. in 1998. BCE bought Teleglobe in 2000.

Like Excel, Lightyear began life as a reseller of long-distance phone service through a multi-level marketing structure, which rewards representatives both for signing up customers and for bringing new sales agents aboard.

Also like Excel, Lightyear has been squeezed by falling long-distance rates, and has branched out into local- and wireless-phone service.

Lightyear, also like Excel, has struggled in the past year amid the fallout in the broader telecom market.

Though the $200 million or so in revenue it had last year was roughly flat compared to 2000, Lightyear fired more than 500 people and shut down both a network-operations center and its data network. It also consolidated its Louisville-area real estate into one property.

The data network, along with Lightyear's business customers and direct-sales force, were what had interested VarTec in the merger in the first place.

Maximizing synergies

Under the terms of its deal with VarTec for Excel, BCE will retain responsibility for Excel's $1.3 billion in long-term debt. BCE has also agreed to accept an interest-bearing note for Excel.

Excel will roughly double VarTec's size, to around $2 billion in sales and 4,800 employees worldwide, helping in VarTec's previously stated goal of growing bigger to compete with larger competitors. VarTec's 2001 sales were about $1 billion.

Some observers say Excel contributed little to BCE, however, and believe the Canadian company is better off getting pennies on the dollar for Excel than keeping it.

"We want to see them get rid of it," says John Grandy, a telecommunications analyst at Yorktown Securities. "We want to see the deal close."

Excel's multi-level marketing structure "worked well for a number of years," Grandy says, but didn't hold up once long-distance prices collapsed. That reduced profits for Excel's sales force, and turnover became a problem.

Excel has also had problems with its billing system, collections and bad debts, Grandy says. Its accounting system has "proved to be inadequate" as well.

Grandy notes that Excel contends its accounting system has been fixed. Still, he adds, "their financial results proved to be quite disappointing."

Indeed, BCE took a $2.04 billion "impairment" charge in the first quarter of 2001 to write down the value of Excel's assets. The reason, BCE said in a release, was "a lower than expected operating profit, due to a reduction in Excel's forecasted minute volumes and average revenue-per-minute, (which) are expected to continue in the foreseeable future."

For now, VarTec says, it is focusing on completing the Excel transaction.

"Once the deal is complete, VarTec will merge its operations with those of Excel and maximize the synergies between the two organizations," VarTec's e-mail says.

VarTec, which currently has around 1,500 employees, says it does not plan any restructuring this year. The company last year fired nearly 390 call-center employees, 200 of whom worked at a Tulsa, Okla., facility, and 190 who were employed at a Waco operation that is being shuttered.

VarTec has its own network, generally considered a key to operating profitably and being competitive on rates. Though its consumer and commercial long-distance service remains a mainstay, its offerings now include things like local phone service for consumers and travel cards. It also provides long-distance service in England and continental Europe.

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