Stephen Young, Dan Bieler
KPN to merge international wholesale voice business into iBasis
KPN announced that it is to merge its international wholesale voice business with international VoIP carrier iBasis to form another entity, called iBasis. Nasdaq-listed iBasis is a leading carrier of international long-distance telephone calls and a provider of retail prepaid calling cards. KPN will contribute 100% of its Global Carrier division to iBasis. It will also make a $55m cash payment to iBasis. In return, iBasis will issue new shares to KPN, representing 51% of diluted shares. iBasis will also pay a pre-closing special dividend of $113m to its pre-closing shareholders. Deal closure is expected by the end of 2006. Comment: How can something be both surprising and not surprising at the same time? Answer: when it's the merger of iBasis and KPN's international voice business.The deal is surprising because it doesn't follow in the footsteps of a previous merger, when two of the smaller incumbents, Swisscom and Belgacom, merged their international wholesale voice businesses. It's not surprising because, first, in M&A terms, there's already a sort of precedent (ie VoIP upstart plus incumbent) in the ITXC/Teleglobe deal. Secondly, it shows how VoIP is ramping up at the international wholesale level; thirdly, it shows the continuing relentless pressures on cost in the international voice market, and the resultant need for scale. It also makes sense geographically, given the complementary footprints of KPN's Global Carrier Services' in Europe and Asia, and iBasis's strong presence in the Americas and Asia.KPN wants to migrate towards an all-IP network in the Netherlands, and this deal gives it the international IP presence to match, much faster than would have been possible on its own. Against this consideration the deal makes sense. But the deal also creates a scale wholesale voice player, number five worldwide, with 15.7bn minutes of traffic, and revenues of $1.1bn in 2005. Crucially, the scale provides better negotiating leverage for lower termination costs and higher return traffic.In addition to these scale effects, the deal should leverage iBasis's trading and routing system to exploit spot trading opportunities. Moreover, KPN expects synergies through back-office integration (IT and administration). Overall, KPN believes that the deal will help it to reduce costs by $10m annually over the medium term.One might ask why KPN did not buy iBasis outright or team up with another incumbent, similar to the Swisscom/Belgacom deal. However, KPN maintains that this deal and the implied arrangement is a deliberate choice. KPN wants to grow its fixed division. It reasons that the agreed structure is operationally suitable for that goal, with the 51% ownership of iBase allowing it to fully consolidate the international wholesale activities, while securing a management team at iBasis that remains fully committed to the wholesale deal.
