The bombshell cancellation by Bell West of a deal with Axia NetMedia Corp. to help build the Alberta SuperNet won’t put the brakes on the project or burden taxpayers with extra costs – but the move could affect future deals for the Calgary company, says one analyst.
Bell West, the provincial government’s main private partner in the high-speed digital network, abruptly dumped Axia last week as the subcontractor responsible for extending the high-speed digital network to 395 rural Alberta communities.
“It’s illegal. They don’t have any right to terminate,” said Axia president Murray Wallace.
Axia will retain a separate 10-year renewable contract with the province to operate the Super-Net, a project touted around the world as an example of Alberta innovation. The network, including its wireless component, will stretch more than 13,000 kilometres, linking more than 4,700 libraries, schools, hospitals and government offices in 422 communities by 2004.
The Alberta government says the dust-up is a commercial dispute between the two companies.
The province budgeted $193 million over three years for the rural portion of the SuperNet, and that amount is capped, confirmed Alberta SuperNet spokesman Jeremy Fritsche. Bell West will face penalties if any deadlines are missed, he added, and any cost overruns will be its responsibility.
“It in no way impacts the contracts we have in place for building and operating the Alberta SuperNet. The plan is to move forward with a completion date of mid-2004,” said Fritsche.
“We knew that the dispute was boiling. But from our point of view, the obligations we have with Bell still stand.”
As for a new partner, “I don’t know how much of a say (the government) has in outlining who Bell chooses to subcontract to,” said Fritsche.
Bell West, a subsidiary of Montreal-based Bell Canada, has invested $102 million to build the base network, which will link 27 larger communities across Alberta. The company was keeping tight-lipped last week in the face of almost-certain litigation.
“Why did we do it? It’s a good question, but in this situation there is potential legal action relating to these matters, and it really prevents Bell West from commenting on any of the specifics,” said Brian Olafson, vice-president of the SuperNet project for the company.
But Brian Pow, vice- president of research for Acumen Capital Finance Partners, speculated on one potential motive for Bell to deep-six the Axia contract.
“I think it interfered with their ability to move things forward. They basically had to get approval every time they wanted to so something,” he said.
“My understanding is Axia would argue that Bell has been a gatekeeper to them being able to move the project forward, and that has been the reason for some of the results Axia has delivered over the last couple of quarters.”
The initial implementation and startup of the Alberta SuperNet project has been touted by Axia’s Wallace as the company’s principal driver of revenue growth. In November, Axia reported delays in Alberta SuperNet construction revenue and sluggish sales in its other interactive network operations, but maintained SuperNet revenue during the current fiscal year would help the company reach a level of sustainable profitability.
Axia’s involvement in the SuperNet was expected to generate more than $500 million in revenue for the company, including $210 million to $240 million for services during the construction phase until mid-2004. The company expects to realize about $40 million a year for operating the SuperNet over the remaining term of the 10-year contract.
A test portion of the extended network, running from Rocky Mountain House to Red Deer, has been completed by Axia and is ready to be turned over to the government, Olafson said. Bell will now decide how to meet its contract obligations for the remainder of the rural linkages by either taking on the project itself or finding a new subcontractor. “It could be a combination of both,” added Olafson.
Pow said the fallout from the contract cancellation could affect Axia’s position on future contracts as it attempts to leverage its SuperNet expertise around the world. Besides building fibre-optic networks, Axia develops online learning applications.
“This is going to eliminate some good cash flow, and it will expose them to more risk around consistency of their revenues,” said Pow.
“If they’re no longer involved in the rollout of the SuperNet, then all of a sudden they’re equals in terms of bidding on any potential future business. The SuperNet project was really a showcase for a lot of other provinces and states. I think it has substantial implications in terms of their ability to win any other potential mandates, and they certainly have those in the funnel,” he added.
Axia CEO Art Price won the SuperNet contract based on his reputation, said Pow.
“And, essentially, what’s being challenged here is the relationships that got him that deal, and their ability to deliver.”
Although its SuperNet involvement demonstrates the profile Axia is capable of achieving, the project doesn’t really add much to the company’s bottom line until the network is operational, added Pow.
“All the mandates that they’ve won so far are very impressive, but they are few and far between, so they don’t have any consistency. And from an investor’s perspective, it’s the volatility that’ll kill you,” he said.
“This is something I don’t think anybody expected, and it moves that risk that much higher.”
