| BUSINESSWEEK ONLINE : MAY 3, 1999 ISSUE | ||||||||
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| INTERNATIONAL -- EUROPEAN COVER STORY
The Upstart Furiously Building Bandwidth (int'l edition) While the telecom mammoths perform their mating dance, a smaller and faster U.S. predator is expanding into Europe. In mid-April, McLean (Va.)-based Global TeleSystems Group swooped into Paris to buy control of Omnicom Group, France's No. 3 phone company, for $200 million. That would barely pay the bankers' fees in the proposed $95 billion Telecom Italia-Deutsche Telekom deal. But the tiny number is a big reason GTS is becoming a fearsome presence in Europe. While the giants struggle to amortize tens of billions of dollars in installed lines and switches, GTS is building a vast European network on the cheap. Result: GTS, with 12,000 km of high-capacity fiber-optic cables, has the most extensive network in Europe. GTS wants to use it to land lucrative contracts with corporations, which will pay big money for state-of-the-art service in data transmission and long-distance phoning. With 35,000 clients in 20 countries, GTS is ready for a flood of data traffic as the Continent embraces the Net. It's even ahead of its big-name U.S. brethren. ''This network is four times as big as WorldCom's,'' says Omnicom President Alain Nicolazzi. GTS is a new breed of telephone operator in deregulated Europe. Betting on explosive growth of the Internet, these new, low-cost players, including Britain's Colt and America's Viatel and MCI WorldCom, are racing to rewire the Continent. For these pipelines, known simply as ''bandwidth,'' the fastest builder is GTS. ''It's a very aggressive company that moves very, very silently,'' says James G. Richardson, Cisco Systems Inc. president for Europe. ''They're going to burst out as a global player all of a sudden.'' You'd never know it from the numbers. The $372 million company, with 4,000 workers in Europe and 100 in the U.S., lost $256 million in 1998. But new CEO H. Brian Thompson says those losses represent investments that should soon pay off. It's a story the market accepts. GTS stock has doubled in the past six months, to $60. On Apr. 19, it completed a $500 million preferred offering that fetched $200 million more than anticipated. GTS was born 16 years ago as San Francisco Moscow Teleport, a nonprofit company funded by a George Soros charitable trust. Its mission was to provide communications between California and universities in Russia. In 1994, now looking for profits, the company bought a stake in Hermes Europe Railtel, a European railroad, to use the right-of-way to lay fiber-optic cable. A year later, it changed its name to GTS. Last year, GTS changed its strategy. The goal was to grow from a simple transmission company, moving data for other telcos, into a full-service Continental phone company. For this it went shopping. Fueled by a $240 million initial public offering and a $105 million private offering, the company bought a controlling share of Ebone, a large Internet service provider, and Netsource, a long-distance retailer in northern Europe. Last December, the group made its biggest acquisition, buying Britain's Esprit Telecom for $1.1 billion. That purchase catapulted GTS to leadership among Europe's new players. But it has lots of rivals. Viatel has built a 5,500-km network linking 20 European cities. MCI WorldCom is constructing its own Euro-network. And the deal with Omnicom brings GTS into direct competition with France Telecom. While Omnicom and GTS have less than $500 million in sales between them, Nicolazzi dismisses the size issue. ``The key is to move quickly,'' he says. Thompson jokes about the mergers convulsing Europe. ``When elephants mate,'' he says, ``it takes 24 months to gestate, and all they produce is another elephant.'' In the race to the Internet, GTS and Europe's other new telcos are gambling that they can get there first. By Stephen Baker in Paris and Catherine Yang in Washington _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ |
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