360networks Calls It Quits

If there is a clear symbol of the trouble that has unfolded in the shadow of the great telecom investment bubble, it is probably 360networks Inc. (Nasdaq: TSIX; Toronto: TSX.TO). The high-profile company, which raised billions of dollars in capital and was headed by former Microsoft Corp. (Nasdaq: MSFT) CFO Greg Maffei, has filed for bankruptcy protection in the U.S. and Canada, and it plans to file insolvency proceedings for several of its European subsidiaries, as well (see 360networks Files for Bankruptcy).

In an announcement last night, the beleaguered carrier said it will take steps to restructure its business and its debt, including evaluating the sale of some assets. The company also said that half of its 14-member board of directors has resigned.

The company has been fighting a rising tide of financial problems for months. Within the past two weeks the situation appeared to escalate, as the carrier missed a key interest payment to debtors (see 360networks Misses Debt Payment and Sun Setting on 360networks ? ), withdrew plans to buy wholesale ISP NetRail (see 360net Backs Off on Purchase), and laid off 800 workers (see 360networks Cuts 800 Jobs).

Tales from the field have been no better. Several sources familiar with 360networks' buildout say the company in recent months realized it was not successfully completing its network buildout and instead turned to a business model of leasing fiber links from other carriers and then reselling them.

Light Reading's own subscription research service, Optical Oracle, at the beginning of June detailed the company's deteriorating financial health in a review of major carriers, ranking 360networks thirteenth out of fourteen. At the time, the company was struggling to complete its network expansion, had reduced capital spending plans from $3.5-$4.0 billion to $2.2-$2.4 billion, reported dismal Q1 results, and still had shown no improvement in growing data services revenue, the key ingredient for carrier success.

Other carriers receiving low rankings in the Optical Oracle report, which assessed technology deployment and financial strength, included Level 3 Communications Inc. (Nasdaq: LVLT), McLeodUSA (Nasdaq: MCLD), and Williams Communications Group (NYSE: WCG).

Now the key question is: Can 360networks be restructured into a successful entity?

The company said it has about $155 million in funds still on hand, plus money from its service-order backlog -- estimated by some sources to be more than $1 billion -- to maintain existing services and complete its North American network buildout. That network, which originally called for a 26,700-mile infrastructure spanning Canada and the U.S., remains half-built.

For investors, however, there's this grim fact: The company has already burned through billions of dollars in investment capital, with almost nothing to show for it.

Regardless of the outcome, the company's failure is likely to leave a bitter taste in the industry's mouth. At one time, 360networks was hotly hyped as a leader of the fiber optic revolution, presumably for the fact that it used a nifty ditch-digging train to draw cable across Canada and was led by the well known, high-profile executive who used to preside over Microsoft's books. The company was later pumped up in the influential Gilder Technology Report, which often draws further investment interest.

Where do the company and its assets go from here? Much depends on whether it can obtain more money to keep going beyond the immediate future. Wall Street analysts are skeptical. "There is no capital out there," says Vik Grover, senior VP at Kaufman Bros. LP. "Wall Street's been demanding consolidation. 360networks hasn't been able to differentiate themselves well over time... Now, they present an opportunity to other carriers."

That opportunity is twofold, Grover says. First, 360networks' assets could be ripe for picking by other carriers. Of particular interest, Grover says, is its South American cable network, for which the carrier holds licenses to operate live service -- a key element some other carriers overlooked.

Other carriers also will be looking to pick up 360networks customers as they fail to renew contracts with the threatened carrier.

There is hope in some quarters that 360networks will survive. "I'm optimistic," says John Kane, CEO of Telseon Inc.. "I anticipate they'll be able to successfully negotiate to restructure their debt." Telseon has a deal to supply 360networks with metro connectivity, although Kane says 360networks does not contribute "a meaningful" amount of revenues to Telseon. Also, Kane says the carrier took financial steps to ensure Telseon wouldn't be left unpaid in the event of its demise.

Ultimately, Kane says, he has faith in the carrier's management team. "We've also worked closely with their bankers and other financing sources, and with their customers. [Filing for bankruptcy protection] is not pleasant for them, but it's not untypical in this current environment, either."

Another 360networks customer, one with more to lose, is also upbeat. Sycamore Networks Inc. (Nasdaq: SCMR), which signed a contract with the carrier in July 2000 to supply up to $420 million in equipment, is taking a positive view. "We aren't surprised, and we've been monitoring the situation for several months, so our exposure is limited," says a spokesperson. "Certainly, we hope they restructure and come out stronger."

360networks also has supply agreements with Cisco Systems Inc. (Nasdaq: CSCO) and Nortel Networks Corp. (NYSE/Toronto: NT). And last year, Alcatel SA (NYSE: ALA; Paris: CGEP:PA) committed to invest up to $1 billion in the company (see Alcatel, 360networks to Partner). The relevant sources at Alcatel could not be reached for comment at press time.

Perhaps the most spectacular demonstration of 360networks' fall is reflected in its market valuation. At one time, the company was valued north of $19 billion. Today, shares remained unchanged, trading at 21 cents, giving the company a value of $170 million or roughly the value of its remaining cash.

- Mary Jander, Senior Editor, Light Reading
http://www.lightreading.com

Editor's Note: Light Reading is not affiliated with Oracle Corporation.