Case
Viatel Inc. (VYTL)
Case outline
Viatel Inc. is a new breed of telecommunications company serving primarily the European market for integrated data and voice with fiber optic cable. Viatel Inc. was created in 1991 in the wake of deregulation of telephone industries in the United States and Europe. Initially it leased volume on existing lines while building a network of switches and points of presence in North America, Latin America and Europe. In 1998, a major switch in strategy led to the design, installation and start of service of 8,700 kilometer of fiber optic cable in Western Europe, and between Europe and North America, which Viatel calls the Circe network. Also in 1998, Viatel Inc. acquired Flat Rate Communications, Inc., a long distance telecommunication reseller (i.e. a competitor) which added capacity and boosted revenues.
Viatel has experienced monumental losses since its inception, which have pushed its net worth to become negative. The losses are attributable to a combination of factors: each of these factors must improve significantly if Viatel is to remain viable. On the revenue side, the major factor is that minute prices have been coming down with the increased competition from other struggling up-starts and incumbent telephone networks. The unit price cut can be absorbed only if volume increases substantially. Billable minutes increased in 1998 compared to 1997 by 172% (form 141 millions to 384 million), but revenue rose only 85% (from $ 73 millions to $ 135 millions) because 94% of the increase took place in wholesale services (retail grew only by 7%).
On the cost side, there are three factors: access costs, network costs and termination costs. Access costs are paid to incumbent local telephone companies which, in Europe, are expected to be forced to lower their prices to competitive levels. Transmission or network costs used to be high because of leasing volume on existing lines, but they are expected to drop dramatically as the Circe network is completed and technological improvements in optronics are expected to multiply transmission rates on fiber-optic cable by 15 times or more. Termination costs are also paid to local telephone companies, but depend to a great extent whether Viatel has a point of presence in the city. Viatel has entered into a number of agreements for interconnection, transmission carrier, volume service, technological alliances (e.g. Lucent Technologies) and business network services. Its number of business customers decreased in 1998 because Viatel left the Asian market and concentrated on European and North American customers.
In spite of the record of losses, Viatel has been successful
in raising capital because of the promise of high growth (60%)
in the cross-border integrated data and voice transmission. In
1996, Viatel raised $ 104 millions gross, or $ 94.5 millions net,
in an initial public offering of 8,667,000 shares at $12 (notwithstanding
that shares traded under $10 throughout that year). In 1998, Viatel
financed its construction outlays by completing an offering of
high yield long term debt:
- 11.25% and 11.15% senior notes due in 2008 for aggregate of
$ 506 millions
- 12.40% and 12.50% senior discount notes due in 2008 for aggregate
of $ 378 millions (net of $ 257,000 of discount on the notes)
- 10% subordinate convertible debentures due in 2011 for $12 millions
Viatel also sold 10% redeemable convertible preferred stock due
in 2010 for $ 42 millions. The indentures include a number of
covenants limiting Versar's ability to incur additional indebtedness,
to pay dividends, to create liens on assets and to enter into
transactions with stockholders or affiliates. Debt generated an
aggregate of $ 857 millions of which $ 118 millions were used
to retire a 15% senior note, and $ 300 millions must be kept in
government obligations as guarantee for servicing of above notes.
In 1999, Viatel completed additional offerings that raised
$ 365 millions in high yield debt and $ 200 millions in equity.
Financial data:
Condensed financial statements without notes are presented for selected years in following tables:
Normalized statements and selected ratios based on above financial statements are presented in
Information sources:
Visit company web site at http://www.viatel.com
SEC 10-K file available at http://www.sec.gov/cgi-bin/srch-edgar or http://www.edgar-online.com/
Viatel stock is traded on NASDAQ under the symbol VYTL. Find stock quotes and recent news from http://finance.yahoo.com/ or http://www.quote.com/ or from the exchange.