Distressed Telecom Assets Pile Up

Telecom assets on the scrap heap: ready to be sold and cleaned up? or just dirty laundry that nobody wants to handle?

It may be too early to tell. One thing is clear, however -- the slow-moving restructuring of carriers like Global Crossing Ltd. (NYSE: GX) and XO Communications Inc. (OTC: XOXO) is postponing any industry recovery, observers say, and it's putting a negative strain on the industry as a whole (see Carrier Bankruptcies in Full Bloom). This means the industry recovery may be delayed.

"The delay in restructuring definitely creates a cloud over the entire industry,” says Jason Knowles, an analyst with Current Analysis. “It is not helping [the carriers’] cause. Businesses are reluctant to sign on with competitive carriers.”

One other potential problem: Recent research shows that most major carriers focused on data networking are distressed, and many experts expect that more restructurings are on the way (see Carrier Crisis: Who's Most at Risk?). That means that more assets will be coming on the market.

"It's almost like [the carriers] would all have to go out, restructure, and then come back in again for the industry to be healthy," says Roland Van Der Meer, General Partner at ComVentures. He says it's inevitable that other carriers will be forced to consider reorganizing their businesses. On his list for consideration: AT&T Corp. (NYSE: T), Qwest Communications International Inc. (NYSE: Q), Sprint Corp. (NYSE: FON), and WorldCom Inc. (Nasdaq: WCOM).

"They may all have to do the same thing,” he says. “They may not be able to make it. They are scared because they don't know what to do.”

Meanwhile, those that have already taken the path to restructuring through Chapter 11 bankruptcy or other means are making slow progress:

  • While bankrupt carrier McLeodUSA Inc. (Nasdaq: MCLD) announced last Friday that it is on the road to restructuring after the U.S. Bankruptcy Court of the District of Delaware confirmed the company’s pre-negotiated reorganization plan, analysts say other restructuring efforts are likely to drag out (see Chapter 11 for McLeod).

  • Buyout giant Forstmann Little & Co., which is investing $175 million in the reorganization of McLeod, has seen its attempts to gain control of struggling XO Communications challenged by financier Carl Icahn (see Shareholders Sue XO). Forstman is offering an $800 million cash investment in return for 80 percent of the competitive local exchange carrier (CLEC) after it’s reorganized, while Icahn, who holds $750 million of the company’s $4.1 billion in bonds, has proposed to pay $550 million in cash for about 55 percent ownership of the restructured company. No matter who wins, the bidding war is postponing the restructuring of the company and the rationalization of the industry.

  • The reorganization of Global Crossing, whose name has been tainted with fraud investigations by the Securities and Exchange Commission (SEC), the FBI, and the U.S. Congress, doesn't appear to have made much progress, as political infighting among its subsidiaries and competing bids by other potential takeover candidates have muddied the restructuring plan.

    In addition to the fraud allegations, the restructuring of Global Crossing, like that of XO, is being slowed by the number of bidders trying to gain control of the company. According to recent reports, Infonet Services Corp. -- backed by a number of European operators, including Royal KPN of The Netherlands, Telia AB of Sweden, Telefònica of Spain, Swisscom, and Japan's KDDI Corp. -- is joining the bidding war for the company. Asian companies Hutchison Whampoa Ltd. of Hong Kong and Singapore Technologies Telemedia Pte. Ltd. (STT) have already made a combined $750 million offer for Global Crossing (see GX Draws Up Rescue Plan); and both Los Angeles investment company Gores Technology Group, run by Alec Gores, and buyout firm Platinum Equity, founded by Tom T. Gores, his brother, announced separately last month that they will be seeking to acquire the company.

    To complicate things further, the company’s subsidiary, Asia Global Crossing Ltd. (NYSE: AX), announced earlier this week that it had signed 19 non-disclosure agreements with potential investors. Hutchinson Whampoa and Singapore Technologies Telemedia are bidding separately for the subsidiary, according to a New York Times report yesterday (April 8).

Not all observers say such problems are indicative of things getting worse, however. Some say they are simply part of the process of cleansing the system.

“The impact on the industry is probably limited at this point,” says Patrick Dyson, an RBC Capital Markets analyst. “It’s hard to think of something that would drag [the industry] lower.”

Global Crossing is the most complex of the carrier reorganizations, observers say (see Global Crossing: More Questions).

"I think they were trying to position [the bankruptcy] as clear-cut," says Current Analysis analyst Kate Gerwig. “But now I think it’s leaving people with sort of a bad taste in their mouth. I can see this one going on for a while.”

In the case of Global Crossing at least, Gerwig says, the bidding war is actually a good thing. Although it is delaying rationalization in the sector, it is also securing a bit more of the pie for the bondholders. While the general fear gripping the sector has resulted in ridiculously low prices, she points out that the battle for control over some of the carriers is pushing the prices back up a little.

“A lot of the people in the industry would like to see those assets sold,” she says, “but at a higher price.”

"The more interest there is in evaluating a company, the better," Donald Klumb, CFO of TMNG Inc., agrees. "It's like going to the supermarket -- you want to have more than one choice."

As long as there is healthy competition between the bidders, Klumb says, it is good for the industry. "If one side checkmates the other, however, it's not good. But we're not at that point yet."

One of the problems facing the carriers trying to unload their assets today is that no one seems interested in picking up the scraps, at least not at a fair price. This doesn’t mean the assets are not needed, observers say, just that there are too many players in the market.

"If you took out all the fiber miles at Metromedia Fiber Network Inc.(MFN) [Nasdaq: MFNX], for example, you know that would cripple a lot of businesses. So it's clearly worth something,” says ComVentures' Van Der Meer. “But they can't make money, so something is fundamentally broken with the model."

— Eugénie Larson, Reporter, Light Reading
knave 12/4/2012 | 10:38:13 PM
re: Distressed Telecom Assets Pile Up
I think he is a PHD n Economics or works for RHK...
flanker 12/4/2012 | 10:38:14 PM
re: Distressed Telecom Assets Pile Up "If you took out all the fiber miles at Metromedia Fiber Network Inc.(MFN) [Nasdaq: MFNX], for example, you know that would cripple a lot of businesses. So it's clearly worth something,Gǥ says ComVentures' Van Der Meer. GǣBut they can't make money, so something is fundamentally broken with the model."

Is he a janitor or a summer intern?

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