European carrier Interoute is on the verge of collapse, thanks to a snag in its restructuring plan, Light Reading has learned. The company says its failure to reach an agreement with Alcatel SA (NYSE: ALA; Paris: CGEP:PA) regarding its vendor financing might leave the company with no choice but to shut down.

Sources at the company say negotiations to restructure the company broke down in the "third step."

"Interoute successfully accomplished the first two steps, but Alcatel refused to negotiate the third step... With no other prospective purchasers, the [Interoute network] is very likely to go into hibernation and eventually collapse," an Interoute spokesman told Light Reading on Tuesday evening.

On Wednesday morning, Alcatel said that it had exercised its right to appoint a receiver -- Deloitte & Touche LLP -- to take over the administration of Interoute. This means Deloitte & Touche will run Interoute on behalf of creditors, with a view to recovering as much as possible of what they are owed. This doesn’t necessarily mean that Interoute’s assets will be sold, although that’s the most likely outcome.

Alcatel says it has “senior security” over the “totality” of Interoute’s network. In other words, it’s in the front of the queue for any proceeds that might come out of selling Interoute’s assets. It also says that any losses that might result from Interoute’s collapse won’t have a big impact on Alcatel’s bottom line. The likely loss was “largely provisioned for” in Alcatel’s third-quarter results, announced in September, a spokesperson said.

Interoute began to restructure the company several months ago, taking steps that included focusing on the business services, reducing the staff by 50 percent, and attempting to restructure vendor financing with Alcatel, says the spokesman.The spokesman says Interoute offered Alcatel €100 million in the restructuring process, or about 20 percent of its outstanding loans. Alcatel is Interoute's main contractor for network construction, and it supplies gear to the carrier as well as financing.

Other vendors supplying equipment and fiber to Interoute include Cisco Systems Inc. (Nasdaq: CSCO), Corning Inc. (NYSE: GLW), P-Cube Inc., and Sonus Networks Inc. (Nasdaq: SONS). Wireless network access provider Megabeam also has a strategic agreement in place with the carrier.

Interoute made headlines recently by buying the Ebone portion of the KPNQwest NV (Nasdaq/Amsterdam: KQIP) network, which had been shut down for a brief period. At the time of that deal, Interoute, which is majority-owned by the Sandoz Family Foundation, claimed to be debt-free (see Interoute Acquires Ebone).

Interoute also recently sold its wholesale voice operations to Wavecrest Communications Ltd. (see Wavecrest Buys Interoute's Voice). The financial terms of Interoute's deals with Ebone and Wavecrest were not disclosed.

In 2001, Interoute said it had revenues in excess of €310 million. The company advertises that it operates an 18,000 route-kilometer network with 60 metro points of presence (POPs). It has POPs in Amsterdam, Frankfurt, London, Madrid, Milan, Paris, Rome, Vienna, and Zurich.

The fact that Alcatel didn't want to renegotiate its vendor financing arrangement is not surprising, analysts say. "[The equipment vendors] are all restricting heavily the kind of vendor financing that can take place," says Craig Johnson, an independent telecom analyst in Portland, Ore. "Any of the vendors that try to finance any of the alternative carriers will find themselves in trouble."

Others in the industry aren't surprised by Interoute's plight. "I knew that they were in desperate need for some funding, but I didn't know how bad it was," says Peter Juffenernholz, the manager of technical sales support at T-Systems Inc. The impact to Interoute's customers is hard to guess at this point, he says. "I would guess that most of their customers are multi-homed… Some individual companies may get hit hard."

— Eugénie Larson, Reporter and Phil Harvey, Senior Editor, Light Reading
www.lightreading.com