Nortel, Cable & Wireless in $1.5B Deal

An investment in Cable & Wireless more and more is taking on a proxy as to whether Internet transport will continue to grow explosively and profitably. Foolish investors should consider how much capital will need to be deployed, and whether this capital will yield a premium that comes with a continued undersupply of any product. In this case, the product is premium global Internet connectivity.

By Bill Mann (TMF Otter)
October 2, 2000

In yet another sign that the switched telecommunications network is giving way to a combined data/voice network, global carrier Cable & Wireless (NYSE: CWP) announced a 10-year management and equipment agreement with Nortel Networks (NYSE: NT).

The scope of the project is immense: Nortel will assist Cable & Wireless in the largest migration from switching to voice over Internet protocol (VoIP) ever undertaken, with all of C&W's European and U.S. facilities being affected.

The total value of the contract, when signed, will be £950 million (or $1.45 billion), a nice annuity for Nortel over the next 10 years. A joint press release from the companies claims the new IP network will be able to handle 900 billion minutes of voice telephony traffic by 2006. Cable & Wireless said it will be developing new end-user products to give its customers the opportunity to take full advantage of a merged network, including next-generation video conferencing and other bandwidth-thirsty applications.

What's the big deal?
Two things are notable beyond the scope of the agreement. First, Cable & Wireless' selection of Nortel is a strong affirmation of the power of the latter company's VoIP product offerings, a market that could reach $15 billion in the next four years as carriers rotate away from their legacy switched networks. This is a powerful combination for Nortel, as well as its competitors, primarily Lucent (NYSE: LU) and Cisco (Nasdaq: CSCO).

This is also another sign that Cable & Wireless has put dead aim on the burgeoning Internet market. Two years ago, the company purchased Internet facilities from MCI that it was forced to divest due to its merger with WorldCom (Nasdaq: WCOM). This, along with C&W's pre-existing facilities, put its global Internet transport market share at 28%.

But C&W has also sold its marine cable construction unit to Global Crossing (Nasdaq: GBLX), sold its U.K. long-distance consumer business to NTL (Nasdaq: NTLI), and offloaded Hong Kong Telecom to Pacific Century Cyberworks (NYSE: PCW). In addition, C&W has already announced investments of some $3.5 billion in a global Internet network.

Now what?
An investment in Cable & Wireless more and more is taking on a proxy as to whether Internet transport will continue to grow explosively and profitably. Foolish investors should consider how much capital will need to be deployed, and whether they believe that this capital will yield a premium that comes with a continued undersupply of any product. In this case, the product is premium global Internet connectivity.

Your Turn:
We know it will be a good deal for Nortel, but is this a net positive for Cable & Wireless -- or are they spending huge amounts of capital on a network that will yield commodity-like returns? Chime in on the Nortel and Cable & Wireless discussion boards.

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