Bankruptcy Bonding?Bankruptcy Bonding?
360networks, back from bankruptcy, plans to buy Group Telecom, in protection from creditors, for $165 million
November 22, 2002
Last week, 360networks Inc. emerged from bankruptcy (see 360networks Comes Out of Chapter 11). A week later, it's ready to spend C$260.5 million (US$165.04 million) on GT Group Telecom, a carrier that remains under creditor protection in Canada (see Court Approves GT Sale and 360networks Restructuring Approved.
Wait, what's this? A carrier fresh from receivership back to wheeling and dealing? Has the incipient Canadian winter frozen intelligent life up north?
Not exactly. On closer inspection, the deal between 360networks and GT just might be a smart move after all -- and one that helps consolidate the industry.
To see why, let's look first at the basics, which seem to have stymied a number of top financial minds in North America. Both companies' public statements are incomprehensible, but after several calls we managed to snag a GT spokesman who outlined the main points for us dummies. Here's what GT and 360networks hope will happen before January 2003:
Step 1. GT Group Telecom Services Corp., the operating company for GT, stops trading publicly but issues a new class of shares.
Step 2. 360networks buys the new shares.
Step 3. The money from 360networks, plus remaining cash on GT's balance sheet, is used to pay GT's secured creditors.
Step 4. GT's holding company, GT Group Telecom Inc., goes into bankruptcy, and 360networks lives happily ever after with GT's assets.
Got that? Let's fill in the blanks. First, it's important to note that no entity of GT is in bankruptcy right now. The holding company will wind up there, but for now, the operating company, GT Group Telecom Services Corp., is merely protected from creditors by Canada's Companies' Creditors Arrangement Act (CCAA). Therefore, a court has to approve all its dealings.
Another key point: Past deals between GT and 360networks are history and don't apply to this sale. Way back in 2000, GT Group Telecom bought fiber from 360networks and sought equity in 360networks (see Group Telecom Announces 360networks Fiber Deal). Ultimately, GT wound up buying about C$70 million in fiber assets from 360networks. But it owns those now, and it holds no equity in 360networks.
Perhaps the most important point, though, is that 360networks won't be losing its shirt on this deal, at least in terms of cash on the barrelhead. Since GT has about C$230 million on its balance sheet now, 360networks might conceiveably need to pay out only about C$35 million to its secured creditors. Happily, 360networks has about US$63 million on hand right now.
A caveat, though: GT's spokesman says elements of the purchase price are final, since so many entities are involved and it's not clear what cash reserves will be left to contribute from the GT side.
GT's secured creditors seem to be resigned to getting C$265 million instead of the C$700 million they're owed. GT's unsecured creditors, owed about C$260 million, will get nothing.
So how does the deal stack up from a market standpoint? With the acquisition, 360networks will combine its long-haul Canadian network, which spans Canada, with GT's 17-city set of metro networks. That will be a good matchup, analysts say. Also, sources say 360networks is well advised to position itself as a pure-play North American service provider to end users instead of as a global wholesaler.
But challenges remain. "360networks is between a rock and a hard place," says Warren Chaisatien, senior analyst at IDC Canada Ltd. Competition from top-tier Canadian incumbents Bell Canada (NYSE/Toronto: BCE) and Telus Corp. (NYSE: TU; Toronto: T) will be fierce, he says.
It's also a question as to whether some holes remain in GT's network, since its vendors pulled out of supply contracts this year (see Group Telecom Takes a Hit). Still, Chaisatien says it's likely discrepancies will be filled by 360networks' gear.
The newly merged company will also face an image problem. "GT has had to fight the perception that it's just another CLEC," says Mark Quigley, research director at Yankee Group Canada. While GT had more success than competitors that have disappeared, such as Norigen, it faces the bad impression some failures have left. Competitors in GT's second-tier segment, such as AT&T Canada Inc. and Sprint Canada, may have an advantage due to their association with American incumbents. Still, a key element in 360networks' favor as new owner is that GT didn't lease but owned its own facilities, Quigley says.
At least one Canadian financial analyst, who asked not to be named, says it's a mistake to dwell on 360networks' recent past or to focus on the negatives in this deal: "Forget about the fact [360networks] went bankrupt -- its just a finance game. Now both have better balance sheets and they are a perfect fit given their differenttarget markets. They should be able to do well now."
— Mary Jander, Senior Editor, Light Reading
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