Network carve-up

In July, Level 3 Communications raised USD500m for "acquisitions relating to industry consolidation," said CEO James Q Crowe. "The shake-out is creating extraordinary opportunities, as telecoms companies, their network assets and customer bases become available."

The rapid collapse of many pan-European operators has led to intense reallocation of services and acquisition of networks. In the case of KPNQwest, this has been redistributed in fragments (see table and panel below).

KPNQwest's bankruptcy at the end of May led more than 100,000 corporate and carrier customers to seek alternative data-service providers to secure connectivity.

Telia established a rescue program to help those affected by defaulting operators, promising provisioning within 48 hours and network availability of 99.99%. It said it would start deploying Ericsson T640 routers in Telia IC's Europe IP backbone in August for "the capacity and flexibility needed to handle the increasing data traffic," according to CEO Erik Heilborn.

On 26 June Belgacom reserved DWDM capacity (36 wavelengths, for a total of eight European rings) on Telia IC´s Viking Network for an initial period of six-months, and ordered STM-1 connections to replace KPNQwest capacity. "Telia's financial stability, combined with an extensive footprint, helped to close the deal," said Bridget Cosgrave, president of Belgacom's Carrier and Wholesale Business Unit.

Interoute assembled a business continuity team which guaranteed to match both KPNQwest pricing on any service and existing service-level agreements. "We are receiving a lot of calls from distressed customers, many of whom are carriers like ourselves," said chairman and CEO Ohad Finkelstein.

Colt formed a 90-person task force to deal with migration. After getting 17 STM-1 backbone connections up and running for KPN within 36 hours, on 7 June it agreed to supply alternative broadband services to any corporate clients.

In response to numerous inquiries Level 3 established a dedicated customer support organisation to assist those concerned service disruption. At the end of May it provided Internet access in Amsterdam "within hours", and wavelength services between Europe and North America "in a matter of days" to SURFnet, the Dutch national computer network for higher education and research.

Level 3's two-ring network spans 3,600 route-miles across nine markets (London, Amster-dam, Brussels, Paris, Frankfurt, Düsseldorf, Hamburg, Berlin and Munich). This year it will expand to eight more (Geneva, Madrid, Milan, Stockholm, Zurich, Cologne, Karlsruhe and Stuttgart).

Equant also created specific business continuity solutions to help migration from troubled carriers and added the equivalent of 75,000km of STM-1s for back-up capacity, allowing re-routing of traffic affected by network shutdown. On 31 July it migrated Austrian lighting company Zumtobel to MPLS-based IP VPN (for staff access from 50 sites worldwide) in four weeks.

"Demand for communications services continues to grow while the number of service providers shrinks," notes Bill Miller, CEO of Level 3 investor Legg Mason Funds Management.

Amsterdam-based KPNQwest was founded in 1998 jointly by Dutch incumbent KPN Telecom NV (40% owner) and US operator Qwest Communications International (47%). Its 18-country 25,000km pan-European network cost EUR1bn to build and carried over 40% of Internet traffic in Europe, valuing KPNQwest at EUR42bn.

Despite owing EUR300m, in March it bought Ebone (Europe's largest fibre backbone, carrying 25% of Internet traffic over 10,000km) for EUR646m. But, after KPN and Qwest withdrew funding, KPNQwest filed for bankruptcy on 31 May with debts of EUR2bn.

To recover the EUR220m owed, lender banks hoped to sell the network intact. Aiming to expand in Europe, AT&T bid USD200m, but withdrew in June, deterred by the network's fragmented ownership. A EUR220m bid from Dutch venture capital company Trimoteur was later rejected.

After banks withheld cash collected from customers, KPN formed a fund with other users to keep the network operating while customers migrated to alternative providers. By 23 May, KPN had contracted Colt to provide broadband services to its own corporate clients.

KPN bid EUR15–20m for assets excluding the Ebone and Central Europe networks (i.e. rings in the UK, Netherlands, Germany and France, plus a transatlantic link), but the bid was rejected. On 12 July the French subsidiary was bought for EUR3m by Sweden's Telia, and KPN cut off funding, saying that most users had already migrated.

On 15 July Ebone, which had been shut down on 3 July, was bought by Interoute for EUR15m, just 2% of the EUR645m KPNQwest paid for it.

At the end of July KPN paid a few million euros for the Dutch assets, the central part of the Eurorings network.

On 8 August the Antel Holding subsidiary of Russian investment Group Menatep paid EUR36.5m for the Central Europe assets, which operate as GTS in the Czech Republic, Hungary, Romania and Slovakia and Internet Partners in Poland.

On 22 August KPN bought the German assets (which includes a 3,500km fibre network), taking on 55 of the 118 staff, and is still in talks with local receivers about acquiring the Belgium and UK assets.

In total, asset sales so far have fetched little more than EUR50m.