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. LLC analyst 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.com Want 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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A service provider's view 12/4/2012 | 10:02:29 PM
re: Genuity Gasps for Breath SBC or Verizon would have to be the driving force to roll it up and I don't think they're that aggressive. My guess is they'll wait it out, see who's left standing, and pick LH networks on the cheap.

How does three-way oligopoly sound: SBC, Verizon and Bell South led - each picks up LH networks post apocalypse?
jgh 12/4/2012 | 10:02:29 PM
re: Genuity Gasps for Breath Let's see Nortel is trading 83 cents, Time Warner Telecom at 75 cents and Genuity at 60 cents. PSInet is a memory, uunet will be sold off as part of the dismantling of Worldcom.
AT&T was broken up by the government in 1984 and the marketplace appears to be putting it back together since it appears that the ILECs are the only one with a chance of survival.
How does AT&T Verizon and SBC Worldcom sound?
Consultant 12/4/2012 | 10:02:28 PM
re: Genuity Gasps for Breath Both of you are wrong.

First of all, you're confusing Chapter 11 with going out of business. Chapter 11 has been a godsend to the competitive carriers because it enables them to strip off the bond debt and receive new injections of cash. McLeod and Covad both used Chapter 11 in this fashion. ICG Communications is coming out of bankruptcy and Winstar still does $150 million in revenue and is now rehiring its former salesforce as it makes big move. Look for Winstar, backed by $1 billion in cash from IDT, to be a significant player now that fixed wireless has matured.

According to the latest FCC report on local competition, the CLEC industry sequentially grew 20% during the first half of 2001 - the latest statistics available.

So competition is not disappearing and the RBOCs themselves face severe problems in wireless substitution and declining access lines.

Looking at stock prices is a poor forecasting tool.

Finally, Ma Bell was a joke. A highly inefficient organization that debated for five years whether to introduce colored phones.

arak 12/4/2012 | 10:02:27 PM
re: Genuity Gasps for Breath As consultant pointed out, the biggest problem yet to be faced by the RBOCs is the competition from CLECs which have cleaned out their debts. This will prolong the pain for the telecom industry as a whole, and drag down the rest of the still profitable ones into bankruptcy with renewed pricing pressures. 2003 & 2004 will be more pain until the second round consolidation goes through its final phases.
A service provider's view 12/4/2012 | 10:02:23 PM
re: Genuity Gasps for Breath
You have a valid point about companies filing chapter 11 and returning debt free...but it doesn't change the outcome. At most, A debt free competitor in the LH space will just further drive price competition and make matters worse for other LH providers. Some competitors need to go away, either through hard bankruptcies or consolidation before that part of the business gets healthy.

Local providers returning from chapter 11 do not have the plant to make a serious run at the ILECs. Nor, will they find investors willing to put up the capital and repeat the debt cycle experienced in the LH space. Sorry, even with $1B in new asset investments, you won't get very far against Verizon's $170B (undepreciated, more if you include depreciated) in assets.

Fixed wireless (like Winstar) has its strengths and its limitations. It is a niche in a market dominated by ILECs and their owned wireline plant. A returning Winstar, even with $150M in revenue and 20% growth means little to a Verizon with $67B in revenues growing $3B a year.

The LECs are seeing access lines decline as a result of wireless phones. Several LECs own those wireless networks that people are migrating to and, regardless, customers will continue to need wireline services in the future.

I agree that stock prices are a poor forecasting tool.

Unfortunately, Ma Bell is no joke. It's our future. I use Verizon as an example, but you could substitute SBC and the outcome isn't much different. I don't like it any more than you do. That doesn't change the reality. IMHO
lghtswtch 12/4/2012 | 10:02:19 PM
re: Genuity Gasps for Breath YE2001 data is now available from the FCC.

At YE2001, 10.2% of the more than 192m total switched lines were reported by CLECs, compared to 7.7% a year earlier.

CLECs reported providing about 22% (down from 43% two years earlier) of these lines by reselling the services of other carriers, and about 47% (up from 24% two years earlier) by means of UNE.
papabear 12/4/2012 | 10:02:15 PM
re: Genuity Gasps for Breath Qwest Communications announced Sunday it expects to restate financial reports for 1999 to 2001 because of accounting errors, including overstated revenues.

The company reported Sunday that accounting policies were incorrectly applied to optical capacity sales in 1999, 2000 and 2001 totaling about $1.1 billion, or 18 percent of the optical capacity transactions during that time.
switchrus 12/4/2012 | 10:02:14 PM
re: Genuity Gasps for Breath Joseph Nacchio, BubbaGÇÖ has your accommodations all picked out in Marion Illinois, better start packing.

BobbyMax 12/4/2012 | 10:02:13 PM
re: Genuity Gasps for Breath It is rather surprising that Genuity lasted this long. There was no need for a company like genuity
the day it founded and there is nio need today. These guys get money from all possible resources and when the money is gone they are gone too. There is absolutely no honesty and integrity in many businesses we see today.
fgoldstein 12/4/2012 | 10:02:10 PM
re: Genuity Gasps for Breath UNE-P (the 47%) is technologically the same as resale; it's just legally different. So two years ago, UNE-P and resale were (43+24=) 67% of the nominal CLEC share; today they're (22+47=) 69%. Thus only 31% of the 10.2% "CLEC" share is anything other than ILEC lines sold through retail dealers, the same way Chevys are sold through dealers, rather than directly from General Motors. So let's not assume that competition is very strong; it's only about 3% of the total. And since it's a very high share of ISP dial-in modems, net competition elsewhere is even more limited.

Still, CLEC is not GENU's market space. So let's get back on to the main thread.

What's really going on is more simple. GENU owes around $2.3B to VZ, and a somewhat smaller sum to some banks. So VZ has figured out that if GENU goes bankrupt, they, as the largest creditor, have dibs on the assets, and can play with numbers to reduce the debt owed the banks. Thus they end up owning GENU just as they would have, only without the debt *or* public shareholders.

Everyone at GENU and VZ has to pretend that this isn't the case, but then the gendarme in Casablanca was shocked, just shocked, about the gambling.
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