Genuity Gasps for Breath

Internet backbone? Who wants a stinkin' Internet backbone in 2002?

July 26, 2002

4 Min Read
Genuity Gasps for Breath

Genuity Inc. (Nasdaq: GENU) was left fighting for its life today after being abandoned by its parent.

Yesterday Verizon Communications Inc. (NYSE: VZ) announced that it no longer wishes to take over the company, which was originally spun out of Verizon (see Verizon Leaves Genuity Hanging).

The move makes Genuity yet another likely victim of bankruptcy, in a world in which Internet network assets seem to be declining in value by the day. Genuity runs a 17,500-mile global telecommunications network that Verizon would have inherited had it gone through with the deal.

In today’s market, with some of the worlds best long-haul network assets up for grabs at fire-sale prices, observers say there’s little benefit in owning the network, when leasing capacity from Genuity and other providers is so much cheaper. Verizon has said it will continue to honor a $500 million, five-year agreement to use the Genuity network.

"The world has changed since Verizon had its eye on acquiring Genuity," says Jeff Kagan, an independent analyst based in Georgia. "They still like Genuity, but don’t want to get stuck with its financial baggage. It’s a buyers market. For now they don’t need [the network].”

Both Moody’s and S&P slashed Genuity’s rating far into junk bond status yesterday.

Citing the market situation and its business needs, Verizon said it would convert all of its Class B shares of Genuity stock into Class A shares, thus abandoning the possibility to spin the smaller company back into its corporate structure. Verizon also said that the move relieved it of any obligations to make further loans to the smaller company.

Now that Verizon has pulled away, leaving Genuity hanging, the smaller company says the decision has forced it to default on $2 billion in bank loans. That, observers say, will probably trigger demands for repayment and possibly a bankruptcy filing. Genuity says it is currently in discussions with its banks and Verizon to review the full impact the decision will have on the company (see Genuity Responds to Verizon's Snub).

The Internet unit that became Genuity was spun out of Verizon when that company was formed through a merger of GTE and Bell Atlantic in 2000. Federal antitrust regulations at the time required the company to shed Genuity, but made provision for a reintegration of the unit by 2005 if certain conditions were met.

Genuity was banking on the Verizon deal to help it survive. The Woburn, Mass., company therefore reacted to Verizon's announcement with disappointment, saying in a statement yesterday that it had taken steps, including cutting costs and improving efficiencies, that Verizon had said would lead to its reintegration.

Following the news, Genuity’s shares plummeted from $2.59 to a mere 42 cents at closing yesterday. Today, the company’s stock had crept back up to 60 cents a pop. But hold the champagne.

“It’s all relative,” says Davenport & Co. LLCanalyst F. Drake Johnstone. “You have to think about where [the stock] was. When companies are trading under a dollar, there’s bound to be speculating in the stock.”

Most observers agree that bankruptcy is still a very real possibility for Genuity, and the company itself says that it hasn’t ruled out a Chapter 11 filing. “It’s fair to say that that could be an alternative,” says John Vincenzo, the director of corporate communications at Genuity. He emphasizes, however, that the first step for the company now is to discuss its options with its banks and Verizon. Other future scenarios, he says, include the firm finding a new strategic partner, or trying to make it as a standalone.

Something that might help Genuity’s chances of survival is the fact that the company drew down $723 million on a credit line with eight banks, bringing its cash holding to $1.3 billion. The company had asked the banks to give it the remaining $850 million on its credit line, but the ninth bank in the credit syndicate, Deutsche Bank AG, has refused to honor the credit agreement. Genuity said it is taking legal action against the bank.

"Verizon is trying to pare down its debt, and… realized that Genuity was a money hole,” says Davenport's Johnstone. “There’s no point in having Verizon’s debt levels rise because of Genuity.”

If Verizon had gone through with the spin-in, it would also have absorbed Genuity’s more than $1.9 billion debt load. By pulling out of the deal and pushing Genuity in the direction of a Chapter 11 filing, however, Verizon still stands to lose a lot of money, by jeopardizing the repayment of $1.15 billion that it has already lent the Internet unit.

— Eugénie Larson, Reporter, Light Reading
http://www.lightreading.comWant to know more? The big cheeses of the optical networking industry will be discussing this very topic at Opticon 2002, Light Reading’s annual conference, being held in San Jose, California, August 19-22. Check it out at Opticon 2002.

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