KPN Sale of International Wholesale Business to IBasis Approved

Great scale is needed to succeed in international wholesale, Gneezy said. “If you're an operator in any but maybe the 10 largest countries in the world, and you operate predominately home country outbound, you will never reach a volume of traffic that will make you profitable in this segment,” he said. So they don’t lose money on lagging international voice businesses, KPN and other telcos will carve out and sell them to companies like iBasis, he said. Meanwhile, operators that aren’t doing wholesale but do the back office work needed to connect international calls will look to outsourcing, he said. “Most incumbent operators are in the throes of converting their core network to IP, and this necessitates that they decide what to do with the international segment of their network,” he said. The companies often find they “do not have enough scale to make that segment profitable” and “cannot justify the additional investment in those network assets,” he said.

It wasn’t this way 10 to 15 years ago, Gneezy said. International traffic used to be a highly regulated market that only “incumbent monopolies” in each country took part in, he said. But a 1997 World Trade Organization telecom decision led to market deregulation that lowered prices and increased competition, he said. Today, businesses need “very high scale and efficiency” to compete, he said.

IBasis and KPN’s wholesale segment don’t overlap much, Gneezy said. Both have “moderate-size operations” in Asia, but the combination of iBasis’s Latin America presence with KPN’s European business made overlap irrelevant, he said. The combined company expects $20 million a year in merger benefits, but reaching that could take more than a year, Gneezy said.

The only integration complexity comes from KPN’s use of a traditional switch-based network, said Jeffries analyst Jonathan Schildkraut. IBasis has an all-IP network, and will need to deploy traditional-to-IP converters in KPN’s territory, he said. IBasis estimates that will cost $30 million over three years. That’s “not much” considering the “massive increase in scale” that the deal offers, Schildkraut said.

The merger strengthens iBasis’ ability to woo mobile operator customers, Gneezy said. IBasis serves three markets: wholesale carriers and calling card operators, fixed retail business, cable and VoIP companies, and wireless carriers. IBasis has historically had the most success with the first area, and been weakest with mobile, Gneezy said. In contrast, KPN has “a lot of good relationships” with European wireless carriers, Schildkraut said. The new iBasis will be “well positioned to get minutes” from these companies, he said.

International voice traffic was made up of about 300 billion minutes in 2006 and it grows about 14 percent yearly, Gneezy said, citing data from research firm TeleGeography. Combined, iBasis and KPN served about 20 billion minutes of traffic for 2006, a number that would have placed it with Verizon and AT&T as one of the top three businesses in the market, he said. That claim is technically accurate, Schildkraut said, but may not take into account network overlap and other complicating factors.

IBasis management will remain and KPN Global Carrier Services General Manager Edwin van Ierland will take an executive position, iBasis said. But the deal means an iBasis board shakeup. KPN executives Eelco Blok and Joost Farwerck will replace David Lee and Charles Skibo. Blok and Farwerck “agreed to step down to make room for the incoming directors,” Gneezy said. In the future, KPN can nominate two independent directors to the iBasis board, iBasis said.