Northern Telecom Ltd. won a $780 million contract with Teligent Corp. and offered to purchase all of the issued and outstanding common shares of Broadband Networks Inc. on a fully diluted basis, indicating its desire to become the leading vendor in the emerging fixed broadband wireless market.
Teligent, led by chairman and chief executive officer Alex Mandl, former president of AT&T Corp., signed a letter of intent naming Nortel the preferred provider and principal integrator of its nationwide system of local digital networks. The letter outlines an equipment purchase contract and vendor financing valued at $780 million during the next five years.
Two days later, Nortel announced its offer to purchase BNI, a 3-year-old manufacturer of fixed broadband wireless communications networks. The purchase would give Nortel the never-deployed point-to-multipoint radio Teligent needs and BNI manufactures for local wireless access.
“The product fits with all of our product lines, switching transmission and data backbone products,” said Doug Patterson, Nortel’s vice president of wireless networks in Richardson, Texas. Broadband wireless access “is the fastest developing area in the marketplace.”
For Teligent, Nortel plans to provide a full suite of networking solutions and help the company manage and integrate its system of broadband wireless networks. This will allow Teligent, holding 24 GHz licenses, to quickly provide business customers voice and data services using a point-to-multipoint fixed wireless architecture, said Nortel.
“Our agreement with Teligent is a confirmation to us that this marketplace is going to develop, and it’s going to be big,” said Patterson. “We’ve done a lot of research in this area. It’s a $5 (billion) to $10 billion market over the next five years. It’s a global market.”
BNI’s technology allows service providers to deliver voice, video and Internet service and high speed data to their business customers across a wide variety of licensed microwave frequencies. The Winnipeg, Manitoba-based company recently won a contract with WinStar Communications Inc. to supply point-to-multipoint radios. WinStar holds 38 GHz licenses and provides broadband communications using point-to-point radios.
Point-to-point microwave service, which is used today to provide the same capabilities as fiber, requires a one-to-one ratio of radios-each radio on a customer site must have a corresponding radio at a hub site. Point-to-multipoint service is attractive to providers because the service requires only one radio at a hub site and can communicate with each remote radio simultaneously, providing economic advantages.
Nortel’s aggregate purchase price of BNI is expected to be approximately $419 million on the basis of $4.20 in cash and .09 of a Nortel common share for each common share of BNI. In connection with the offer, certain shareholders have agreed to tender their some 24.2 million BNI common shares into Nortel. BNI said its management is behind the offer.
“I would not be surprised if Lucent partnered with a radio manufacturer, and it wouldn’t be surprising if Ericsson did the same,” said James McIlree, investment banker with Loewenbaum & Co. Inc. in Austin. “Both point-to-point and point-to-multipoint are very big markets.”
Broadband wireless access service, attractive to competitive local exchange carriers, cable companies and LECs, is used by network operators to deploy networks faster than landline networks and deliver full two-way voice, data and Internet services to customers, said Sheila Burpee, BNI spokeswoman. “Broadband wireless makes a very strong business case because of the ratio of fixed to variable costs,” said Burpee. Network providers only incur extra costs when they bring on a new customer.
Nortel and other manufacturers are attracted to this sector because of government decisions worldwide to free up spectrum for broadband wireless service and deregulate their telecommunications markets. According to Loewenbaum & Co., the leader in this trend is the United States, which plans in December to begin auctions of Local Multipoint Distribution Systems in the 28 GHz-31 GHz bands. Canada, Mexico, the Philippines, Thailand and Russia also are committed to spectrum for broadband wireless services, providing big opportunities. Most of these operators are expected to use point-to-multipoint radios. P-Com, Harris Corp., Ericsson Inc. and Digital Microwave are just a few of the many companies planning to develop point-to-multipoint products.
The U.S. LMDS auction plans have been delayed for various reasons in the past, which has caused prospective network operators in the United States to look at other, less publicized, broadband wireless frequencies like 24 GHz and 38 GHz, spectrum used by Teligent, Advanced Radio Telecom and WinStar, said BNI.
Now set for Dec. 10, U.S. LMDS auctions could turn out to be a dud because the Federal Communications Commission has rules in place to prohibit local telephone and cable companies from bidding for spectrum within their own service areas. The commission also decided in September to drop installment payments. These two rules could turn off large incumbent telephone companies and bar smaller companies that don’t have upfront financing from bidding.
With an appeal pending in federal appellate court over the matters, the United States Telephone Association, which represents incumbent telephone companies, Bell companies and GTE Corp., and designated entities have teamed up to petition for a 60- to 90-day delay of the auction, said Mary McDermott, USTA vice president for legal and regulatory affairs.
“We have an appeal pending in federal appellate court. We asked for the court to expedite the proceeding. They did expedite it, but still the oral argument is not until Jan. 16. Without the court’s decision, our participation [in the auction] is hampered. We don’t want to see the auction occur until we have a shot to participate,” said McDermott. “If incumbent telephone companies are not able to participate and small entrepreneurs have not had a chance to get financing together, who is going to be there to bid? … More important than that, [the FCC] want[s] to be able to have bidders in there that have a commitment to developing this service, and that is not going to happen unless some of these things are resolved.”
