Williams Communications Group Inc. has settled a long, drawn-out dispute with its single largest customer, SBC Communications Inc., thus coming a step closer to emerging from bankruptcy.

One catch, though: Right now, nobody knows what the settlement is.

The two companies filed the settlement last Friday night, and U.S. bankruptcy judge Burton Lifland is considering it in a court hearing today. The details of the settlement have not yet been disclosed, but Williams is clearly happy with the results. “Basically we got what we were looking for,” company spokeswoman Deb Trevino said yesterday.

The two companies clashed over whether exit clauses in a 20-year, multibillion-dollar contract entitled SBC to terminate the agreement. SBC claimed that Williams Communications’ spinoff from parent company Williams Companies, Inc. (NYSE: WMB) in April 2001 constituted a change of ownership -- something it argued would allow it to end the deal. Although SBC has never said that it intended to terminate the contract, uncertainty over whether Williams’s main source of revenue would soon dry up, as well as the potential for litigation, put the company’s bankruptcy restructuring plan in jeopardy.

The remaining 16 years of the SBC contract will reportedly generate $10 billion in revenues for Williams. “SBC really has a huge impact on the value of the company,” says analyst Peter Cohan of managementconsulting firm Peter S. Cohan & Associates.

"This certainly removes a hurdle," Trevino says, revealing that the settlement resolves the change-of-control issue. She says SBC has agreed that the spinoff from Williams Companies, as well as the $330 million investment by Leucidia National Corp. that is part of the restructuring package, do not constitute a change of ownership. In return for backing down, SBC has reportedly asked for legal assurances from Williams.

Both Williams and SBC will be needing legal protection, says Robert Aceti, an accountant and a stockholder in the pre-reorganized Williams. He thinks the deal between the two companies was a so-called sweetheart deal, in which SBC was given very beneficial conditions in exchange for signing on for 20 years. This, he says, may not, however, have been apparent in Williams’s earnings statements, which could have been artificially pumped up with anticipated future earnings from the deal.

“I’m suggesting that [SBC] got a sweetheart deal,” says Robert Aceti, an accountant and a stockholder in Williams. “I’m questioning whether it was such a sweetheart deal that it could have pumped up Williams’s revenues.”

SBC, which was Williams’s second largest shareholder before the bankruptcy, would not comment on the settlement.

So what's next in the long and complicated path to restructuring? A confirmation hearing on Williams’s restructuring plan will be held next Monday. The hearing date was originally set for today, but Trevino says the company wanted to put the SBC dispute behind it before moving on.Right now, the plan calls for the sale of 45 percent of the reorganized company to investment firm Leucidia, which in return will invest $150 million in the company and pay Williams Companies $180 million to relinquish all claims to its former subsidiary. Under the proposal, bondholders will own 55 percent of the restructured company, which listed $5.99 billion in assets and $7.15 billion in debt when it filed for bankruptcy on April 22 (see Williams Goes Into Chapter 11). Unsecured debt of about $5 billion will be converted to stock in the newly created company (see Williams Regroups, Refunds, Reorgs).

While a final settlement of the SBC debacle will certainly make life easier for Williams, the bankrupt carrier’s problems are far from over. The company says it expects to reemerge from bankruptcy this fall -- probably in mid-October -- but it still faces a raft of lawsuits and allegations from shareholders that its spinoff was merely a fraudulent plot to rid the parent company of billions in debt and wipe out the subsidiary’s shareholders.

“Shareholders allege that it was the intention of WMB to spin off a subsidiary of the company, which it knew to have too much debt to operate as a going concern for more than a limited length of time,” contends The WCGInvestigator, a Website dedicated to shareholders’ fraud allegations against Williams. ”Shareholders believe that WMB, and WCG acting under the direction of WMB, likely put things in place that would allow them to force the company into bankruptcy, thus committing bankruptcy fraud.”

And there are plenty of angry shareholders that continue to steam about the Williams management.

“I think it’s fraud,” Aceti says, pointing out that Williams Companies spun Williams Communications out with more than $3.5 billion in debt. When Williams Communications filed for bankruptcy less than a year later, it owed its former parent $2.3 billion. “I think it was all preplanned... I think we were totally kept in the dark.”

Many observers agree that the details surrounding both the spinoff and the bankruptcy filing are obscure, but most won’t go so far as to say that the whole thing was a con game.

"I don’t think it’s a scheme, but it looks bad,” says Victor Sahn of Sulmeyer Kupetz Baumann & Rothman, an attorney representing the Williams shareholders. “As far as the public is concerned, it smells.”

"There’s 'illegal' and then there’s 'unethical,' " says Craig Johnson, an independent analyst based in Portland, Ore. "That’s not necessarily the same thing in the [stock world]... I feel sorry for the shareholders at one level... but belief means nothing. There’s no guarantee."

In a previous reorganization plan, shareholders were set to be completely wiped out, but Williams’s latest amendment to its plan allows them to recover 2 percent of the equity in the new company if they refrain from filing suit against the company or its executives. Bondholders and Leucidia would each contribute 1 percent to the shareholders. This part of the plan has yet to be settled. At its height, Williams stock was worth more than $60 a share.

In addition to the fraud allegations, many shareholders have also complained that Williams never gave them details of other offers for the company besides the Leucidia deal. While they did hear of an offer from Level 3 Communications Inc. (Nasdaq: LVLT), no details were revealed, they say. Some charge that Williams chose to go with the Leucidia deal because it is the most beneficial to the management of the company (see Level 3 Makes a Curious Offer). “The offer from Level 3 was never pursued,” Sahn says. “It was never opened up for bidding.”

Williams's Trevino concedes that the company received a number of propositions from various investors, but insists that it deemed the Leucidia deal the most advantageous to the company’s stakeholders. “The information was shared as appropriate,” she said in an interview last month.

— Eugénie Larson, Reporter, Light Reading
www.lightreading.com