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Broadwing May Sell Broadband Unit

Light Reading
News Analysis
Light Reading
1/13/2003
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Struggling carrier Broadwing Inc. (NYSE: BRW) announced today that it may sell its cash-hemorrhaging broadband division, after taking a charge of about $2 billion in the fourth quarter to reflect the diminishing value of the assets in the unit (see Broadwing Reports on Restructuring).

Along with financial advisers Lehman Brothers Venture Capital Group and Banc of America Securities LLC, Broadwing said it is considering several strategic alternatives for Broadwing Communications.

The carrier also said it has secured a commitment for $350 million in funding from Goldman Sachs & Co., up from the $200 million it announced it was getting in December (see Broadwing Gets $200M).

Following the news, Broadwing’s stock price rose 7.61 percent in trading today, jumping 35 cents to $4.95 a share.

Proceeds from the new financing commitment, which is contingent on the company successfully amending its $1 billion credit facility, will primarily be used to pay down its $2.6 billion debt load, the company said. Broadwing has nearly $1 billion in debt coming due in 2004.

An approved amendment of its credit facility is also a condition if the company wants to meet its 2003 liquidity requirements. On a conference call today, Broadwing’s CEO Kevin Mooney said the company has initiated discussions with its agent banks to renegotiate the credit facility and to amend the 2004 maturity date. He said he hopes to have the issue resolved by the end of the first quarter.

“We hope and expect [that this] will considerably improve Broadwing’s liquidity,” he said.

Only a few days before Broadwing announced that it would receive $200 million in funding last month, rating agency Standard & Poor’s downgraded the company, stating that the company risked facing liquidity issues in 2003 if it couldn’t manage to extend the maturity date on its debt and amend its credit terms.

The Cincinnati-based company launched its restructuring plan last October to strengthen its financial position, maintain the stability of its Cincinnati Bell local phone business, cut costs and losses at Broadwing Communications, and reduce its debt.

In view of the current market conditions, industry observers say the sale of the broadband unit may be tough.

If the level of the bids for the unit are not satisfactory, Mooney said the carrier may shut down the unit altogether. That is, however, an unlikely outcome, says Broadwing chief of staff Tom Osha. “We’re looking at all the options," he says. “Shutting it down would not be our first choice.”

As to who the buyers might be, Mooney would only say that there was a good mix of people from inside and outside the industry who are voicing their interest.

“This is the type of thing that a Warren Buffet or a Leucidia might be interested in,” says Peter Cohan of Peter S. Cohan & Associates. “It wouldn’t surprise me if a value investor would buy the broadband piece if they got a low enough price.”

Although selling the unit could bring Broadwing some much-needed cash and could help it slash its costs -- the devision burned through $39 million in the third quarter alone -- longer term, observers warn, a sale could have dire consequences. For the nine months ended September 2002, the unit generated more than half of Broadwing's total revenues, bringing in $843.4 million of a total $1.65 billion.

“It would be a shame if they ended up selling off the broadband unit,” says Jeff Kagan, an independent analyst based in Georgia. “That is their key to growth in the future. I hope they aren't backed into a corner to do that. It would be like throwing the baby out with the bathwater.”

Mooney insisted that recent cost-cutting efforts had shed a lot of the unit's costs and that it should be cash-flow neutral in the second quarter this year.

The carrier said it would postpone the release of its fourth-quarter results, which it had planned to report at the end of this month, until after it has completed negotiating its credit facility and has reached more clarity on a possible broadband sale. In the meantime, Broadwing reiterated its forecasts for 2002, saying it expects to report EBITDA of $640 million, capital spending of about $190 million, and revenues for the year of approximately $2.15 billion.

— Eugénie Larson, Reporter, Light Reading

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