Broadwing Looks Ahead

Light Reading
News Analysis
Light Reading
3/27/2003



Broadwing Inc. (NYSE: BRW) updated Wall Street on 2002 earnings and a new recapitalization scheme today (see Broadwing Reports 2002 Results).

On a conference call, analysts congratulated Broadwing on completing a Byzantine set of transactions required to fulfill the carrier's restructuring initiative.

But there were few positive words about Broadwing Communications, the broadband subsidiary the carrier's selling to a group primarily backed by Corvis Corp. (Nasdaq: CORV). Indeed, today's report seemed to underscore questions about the condition of the unit and why it would be attractive to the potential buyers (see Corvis Notes Broadwing Wiggle Room).

Broadwing is clearly eager to jettison its high-speed subsidiary, which it says was responsible for a fourth-quarter revenue decline of 8 percent year over year. Broadwing reported a total of $2.16 billion in revenue for fiscal 2002. Broadwing Communications reported $1.07 billion for the year, an 11 percent decline from 2001.

While the parent's two other units, Cincinnati Bell and wireless services, showed operating income, Broadwing Communications reported an operating loss for 2002 of $2.28 billion, a 22 percent increase from 2001's figure.

Broadwing was upbeat about the health of the parent company. Execs said the primary businesses, including Cincinnati Bell and wireless services, are growing, and its liquidity is up. EBITDA (earnings before interest, tax, depreciation, and amortization) grew 11 percent to $641 million, and the balance sheet is "cash flow positive" for the second quarter in a row.

Broadwing's recapitalization scheme defies the understanding of mortals without finance degrees. Still, here's an attempt at highlighting the key points:

  • Bank debt reduced: The company has obtained $350 million in new funding from Goldman Sachs & Co. and will use $220 million of that to permanently reduce bank debt, which now stands at $1.8 billion. The remainder of the money will be added to a tranche on the carrier's revolving credit facility.
  • Debt from Broadwing Communications reduced: Preferred stock and subordinated notes in Broadwing Communications will be exchanged for common stock in the parent company, Broadwing Inc., taking $500 million of debt and minority interest off Broadwing's balance sheet.
  • Permission to proceed with sale: Thanks to these transactions, Broadwing has permission to proceed with the sale of its broadband subsidiary to C III, the outfit backed by Corvis. It also has limited the amount it's pledged to pay in funding for its subsidiary -- just $58 million more remains of its obligation.

At least one analyst thinks the negativity surrounding Broadwing Communications in today's report from its parent is nothing new. "There was no real update... [Broadwing Communications] does continue to lose money," says William Power of Robert W. Baird & Co. Inc. In his view, the parent company's progress has little to do with its subsidiary's status, which remains a question.

Would any of this discourage C III from buying? At least one group within C III doesn't think so. Pete Abel, a spokesman for Cequel III, the management and investment firm that owns 1 percent of C III, contends that Jerald Kent, Cequel III's CEO, is renowned for being able to see opportunities where others don't. And as to the chance that Cequel III's other interests, including wireless towers and cable services, present synergistic opportunities for Broadwing Communications, Abel says, "A resounding 'yes.' " The opportunity for new products and services to cable and wireless sectors over the broadband network was a key reason for Cequel III's interest, he said.

— Mary Jander, Senior Editor, Light Reading

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