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Interoute at Dead End?

Liquidation at Interoute seems imminent, with the market thumbing its nose at broken carriers

December 2, 2002

3 Min Read
Interoute at Dead End?

Interoute Telecommunications, a privately owned, pan-European carrier, seems to be edging closer to liquidation as news leaked out late last week that last-ditch talks between its vendor-financier Alcatel SA (NYSE: ALA; Paris: CGEP:PA) and the company have fallen apart.

The company’s future was already on shaky ground after it announced on November 20 that Nick Dargan and Nick Edwards, partners at Deloitte & Touche LLP, were appointed joint administrative receivers (see Interoute Goes Into Receivership). These receivers were appointed after Alcatel, which had financed much of Interoute’s network buildout, decided it wanted to look for an exit strategy.

The role of the receivers is to continue running Interoutes’s I-21 network while they look for potential buyers. The I-21 network connects 45 cities in nine countries across 18,000 cable kilometers (11,250 cable miles). The company also has metropolitan area networks (MANs) in Amsterdam, Frankfurt, London, Madrid, Milan, Paris, Rome, and Vienna.

Sarah Barber, a spokesperson for Deloitte & Touche, denies that any sort of deal came apart last week.

“Nothing has changed since November 19th,” says Barber. “I can only refer you to news published on the Website.”

Even though the news isn’t on Interoute’s official Website, a story was published last Thursday on Total Telecom stating that Alcatel had rejected a management-buyout offer worth €100 million. This plan was supposedly secured through cash and guaranteed by the Sandoz Family Foundation, the company’s largest investor. It included €60 million over 2.5 years and €40 million over five years.

Alcatel allegedly rejected the offer on Wednesday November 27, suggesting that the assets were worth more than that, according to the story. Workers were told the news on Wednesday evening and did not return to work on Thursday. No one was available for official comment at Interoute, but a security guard who answered the phone at the company last week confirmed that it had shut down and that all employees were let go as of last Thursday.

Alcatel did not return calls by press time to offer comment.

Analysts following Interoute’s meltdown aren’t surprised.“There really aren’t too many options to a company in this situation,” says Craig Johnson, a principal at The PITA Group, an independent network consultancy, “especially when you’re in negative cash flow and you’re already living on yesterday’s earnings.”

Other carriers based in the U.S. have also been down this path. Some, like DSL-provider Covad Communications Inc. (OTC: COVD), are emerging from restructuring much healthier than before. Some troubled carriers are merging together. 360networks Inc. announced earlier this month that it will merge with GT Group Telecom, Canada's largest independent, facilities-based telecommunications provider, in a deal worth $260.5 million (see Bankruptcy Bonding?).

But other carriers, like Genuity Inc. (Nasdaq: GENU), are being sold for pennies on the dollar. The company just announced last week that Level 3 Communications Inc. (Nasdaq: LVLT) has gotten approval to buy it for $242 million (see Level 3 to Acquire Genuity Assets).

“These carriers are all selling for a small fraction of what their networks are worth,” says Johnson. “But they have no other choice.”

The problem in Europe is exacerbated by the fact that few carriers are bought fully intact, according to a recent study by Probe Research Inc. (see Hey, Buddy... Wanna Buy a Network?). There are many reasons for this. For example, Johnson says there are fewer large-value investors in Europe poised to bottom feed as there are in the U.S. What’s more big European carriers like Cable & Wireless (NYSE: CWP), Deutsche Telekom AG (NYSE: DT), and France Telecom SA (NYSE: FTE) are all struggling with major debt loads, making it very unlikely they’d buy a fringe player like Interoute.

— Marguerite Reardon, Senior Editor, Light Reading

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