Global Crossing: What, Us Worry?
Members of the U.S. Congress say the company isn't fully cooperating with its investigation. And telecom analysts are dismayed that the company's post-bankruptcy plan is almost a carbon-copy of its previous business plan, minus billions of dollars in debt. It's enough to lead one analyst to describe the company's business case as "Chinese Water Torture."
First, the angry politicians: The Committee on Energy and Commerce has received increased power to issue subpoenas in its investigation of the bankrupt carrier and Qwest Communications International Inc. (NYSE: Q), because it believes the companies are withholding information. Expect more legal fireworks in the next few weeks.
The committee has reportedly complained that Global Crossing has been slow to produce documents and, in some cases, has even refused to provide access to them altogether. Both Global Crossing and Qwest are also under investigation by the Securities and Exchange Commission (SEC) and the U.S. Department of Justice for their allegedly creative accounting methods (see Qwest Called on Global Crossing ).
Global Crossing and Qwest representatives deny they are dragging their feet in any investigations.
"Global Crossing has actively cooperated with the inquiry,” Global Crossing spokesperson Tisha Kresler told Light Reading in an email. “As part of that effort, Global Crossing has voluntarily produced to the Subcommittee approximately 60,000 pages of documents and roughly 40,000 e-mails and e-mail attachments… Global Crossing has [also] made available 18 present and former directors, officers and employees for interviews."
"The allegations that we've been uncooperative are untrue," says Qwest spokesman Steve Hammock, claiming that the company has handed over more than 250,000 pages of documents and that its executives have spent more than 80 hours meeting with investigators and answering questions.
Documents obtained by the committee and testimony from former and current employees at both companies, which will be presented at a congressional hearing on Tuesday, apparently lends credence to allegations that Global Crossing and Qwest have indulged in transactions and capacity swaps to enhance their earnings results.
"These documents clearly spell out some of the concerns we have about these companies engaging in phony transactions simply to meet Wall Street expectations," says congressman James Greenwood (R-Pa.), who heads the committee's oversight and investigations panel, in an emailed statement. "In many cases, we've been told one thing in interviews while the documents say something entirely different. That's very troubling."
Last week, Global Crossing chairman Gary Winnick was subpoenaed by the committee (see Winnick Subpoenaed), but news reports today indicate that Winnick is trying to negotiate his way out of testifying under oath. Committee spokesman Ken Johnson reportedly said that Winnick had agreed to meet with investigators if they would drop the subpoena and not force him to testify before the committee under oath.
"We are disappointed that the committee’s spokesperson continues to make unfair and inappropriate statements about my client and Global Crossing,” Gary Naftalis, Winnick’s attorney, said in a statement in response to the remarks.
Winnick and former Qwest CEO Joseph Nacchio have both been criticized for selling large chunks of their companies’ stock as the companies were struggling to boost revenues and keep share prices from tumbling further (see GlobalX: The Burst Bubble). They are both expected to be called in to testify before the committee early next month.
The carrier, which filed for the fifth largest bankruptcy in corporate history in January, seems confident that it can not only reemerge from Chapter 11 early next year, but also post a profit. That, many analysts say, is highly unlikely.
One of the major problems with the carrier’s roadmap to profitability, according to i2 Partners LLC analyst Andrei Jezierski, is that its positive cash-flow scenario seems to rely on continued and growing Indefeasible Rights of Use (IRUs) sales. Global Crossing’s accounting for some of its IRU sales, or so-called capacity swaps, is the main focus of several of the ongoing investigations into the carrier, including the House investigation (see Global Crossing: More Questions). And analysts are troubled that these deals will continue to be a large part of business in the company's post-bankruptcy scenario.
“A blanket statement that all IRU sales are useless is certainly incorrect,” Jezierski says. However, he insists that Global Crossing’s expectation that it will expand its IRU sales from $150 million in 2002 to $425 million in 2006 is very optimistic. In the current financial climate, the number of IRU sales is more likely to decline than grow.
"Qwest is not selling IRUs anymore because they said the demand has evaporated,” Guzman & Company analyst Patrick Comack points out. “Last time I looked, Global Crossing’s IRU sales weren’t that spectacular either. There’s still tons of capacity out there. I’m not too enthusiastic about their chances.” IRU sales aren’t the only problem with Global Crossing’s reorganization plan, according to Jezierski. The company also anticipates strong growth in the deployment of IP services starting as soon as next year. In the midst of an industry-wide meltdown, and with few signs of a pickup in capital spending any time soon, Jezierski says it’s unlikely we’ll see mass-adoption of IP services until well into 2004 (see Verizon: More Capex Cuts). "Carriers like Level 3 and Global Crossing keep banking on... a transition to IP-based network interconnections. It seems like Chinese water torture.” “The probability that [Global Crossing] would achieve profitability in the time frame they’re suggesting is extremely low,” says Davenport & Co. LLC analyst F. Drake Johnstone. “They’re out of touch with reality.”
Global Crossing’s reorganization plan follows its announcement in August that Asian duo Hutchison Whampoa and Singapore Technologies Telemedia Pte. Ltd. (STT) would invest $250 million in cash in return for a 61.5 percent share of the company (see Global Crossing Finally Sold). The company expects its reorganization plan to be approved by the courts in December, opening the way for it to reemerge from the Chapter 11 process early next year. When the company emerges from bankruptcy, it will have $200 million in long-term debt and $150 million in cash, down from the $12.4 billion debt load it had when it filed for Chapter 11 protection in January.
"With strong sponsors behind it and a de-leveraged balance sheet, Global Crossing is in a position to grow its customer and revenue base,” the company states in its reorganization plan.
While more cash and less debt will certainly improve the carrier’s chances of survival once it emerges from bankruptcy, it might not be enough. “They’re counting on a smaller version of what they’ve had all along,” Jezierski says, “And that hasn’t exactly been a winning solution.” Even if the company were relying on a sounder business model, Comack says he doubts it will be able to attract many customers to its network. “The brand name has been damaged beyond repair,” he says. — Eugénie Larson, Reporter, Light Reading