The Anglo File: Energis Left Vulnerable by Global Crossing's Nab of Racal - TheStreet

The Anglo File: Energis Left Vulnerable by Global Crossing's Nab of Racal

With its object of desire falling into enemy hands, the U.K. telecommunications group will find it difficult to maintain its autonomy in a fiercely competitive market.
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With

Global Crossing

(GBLX)

nipping in to outbid U.K. telecommunications group

Energis

(ENGSY)

for

Racal Telecom

(RCALY)

earlier this week, Energis is looking sad, lonely and a wee bit vulnerable.

The immediate reaction to be expected would be a counterbid by Energis. But Energis' chairman issued a statement expressing his belief that Global Crossing had overpaid for the acquisition, dimming that speculation. With a bidding war most likely out of the question, what's next for Energis? Fairly simple: Eat or be eaten.

The market is certainly betting that Energis will likely wind up on someone else's dinner table. Initially falling Monday after news that Global Crossing had trumped Energis' 750 million-pound ($1.24 billion) cash-and-share bid for Racal with an all-cash offer of 1 billion pounds, Energis shares have since risen 3.6% to close Tuesday at 18.56 pounds.

There is unlikely to be a shortage of interested parties in the telco. Energis, which was spun off by the electricity distributor

National Grid

two years ago, offers an attractive way to enter both the British and European telecom markets, the importance of which is well illustrated by Global Crossing's pricey bid for Racal. Indeed, Energis' primary reason for wanting Racal was defensive -- to prevent a foreign competitor from entering the market.

With that defense in tatters, the predators are circling. Unsurprisingly, the two names that immediately crop up are

Deutsche Telekom

(DT) - Get Report

and

France Telecom

(FTE)

, both of which have money to spend and, following the collapse of their

Global One

alliance, need to prove they are still relevant in today's changing global telecom market.

Deutsche Telekom and France Telecom already have a joint venture with Energis, known as

MetroHoldings

, which is building local networks in major British cities. However, true to prickly form -- France Telecom and Deutsche Telekom have been barely on speaking terms since the German telco made an unsuccessful bid for

Telecom Italia

(TI)

without informing its partner -- they appear to have their minds elsewhere and are currently squabbling over the remains of Global One.

Steve Trowbridge, an analyst with the U.K. brokerage

Teather & Greenwood

, who has a buy rating on Energis, mooted the interesting possibility of DT-FT rival

MCI WorldCom

(WCOM)

-- which has a 25-year bilateral agreement with Racal to use its network infrastructure -- looking at Energis. Teather & Greenwood has no investment banking relationship with Energis.

With the future of this partnership uncertain, WorldCom may find that it is in its best interests to establish permanent access to the U.K. and European market, a strategy that acquiring Energis would help accomplish. However, WorldCom has been on a buying spree. Although Energis' market cap of only $8.6 billion looks small compared to the $115 billion WorldCom is prepared to fork out for

Sprint

(FON)

, it may prove an acquisition even the rapacious CEO of WorldCom, Bernie Ebbers, would find hard to swallow.

A spokesman for WorldCom told

TSC

it was too early to tell if a successful bid by Global Crossing for Racal would have any ramifications for WorldCom, but Stuart Conrad, an analyst with

Deutsche Bank Alex. Brown

, believes there is no reason why Global Crossing would stop leasing capacity to WorldCom, eroding the value of Energis to the American giant.

No doubt Energis would prefer to remain independent. But with Racal falling into enemy hands and another competitor entering the already-cutthroat corporate telecom market, Energis will find it difficult or expensive -- most likely both -- to maintain its autonomy.

One possibility would be for Energis to buy

Scottish Telecom

, which has a very similar business structure to that of Energis only it is focused on Scotland, so there is little overlap. Scottish Telecom is owned by

Scottish Power

(SPI) - Get Report

and is currently in the process of being floated together with Scottish Power's Internet operations. The conventional wisdom puts a value of approximately 1.4 billion pounds on the telecom-Internet entity, which has been rechristened

Thus

.

Alternatively, Energis could pursue its European expansion plans, which were put on hold by its plans to buy Racal. In August, Energis bought the Swiss Internet services group

Unisource Carrier Services

for 60 million pounds, and in doing so won plaudits from the investment community for managing to transform itself from being a British long-distance carrier into a pan-European operator with a network presence in 11 countries.

There is also the possibility that Energis may try to enter the lucrative cellular market. Currently, the British government is laying the groundwork for auctioning the licenses for next-generation mobile phones, which will offer data as well as voice. The government says it plans to offer licenses to the four current operators as well as a fifth to a new entrant.

The likely outcome for Energis is hard to tell, but what is certain that in this current environment for telecoms, nobody can look lonely for long without something happening.