Mergers & acquisitions

GTS Moves up Debt Danger List

A growing number of European telecom carriers are behaving like tea kettles these days. They're whistling while they're up to their necks in hot water -- and some of them may be about to run out of steam.

Global TeleSystems Inc. (GTS) (NYSE/Frankfurt: GTS) is one of the most watched in the bunch -- especially now that it's announced it won't make a $12 million bond interest payment for its Esprit Telecom subsidiary. Esprit issued $219 million in high-yield (junk) bonds to investors last year before it merged with GTS.

Esprit's bondholders are meeting with GTS in New York this week to figure out what to do next. They could either claim Esprit's assets or claim the proceeds those assets would bring in, if sold.

"If I was an Esprit bondholder, I wouldn't be too optimistic of what I'm going to get," says Alex Paterson, an analyst with Merrill Lynch & Co. Inc. (NYSE: MER) in London.

"GTS is in a very difficult position," Paterson adds. Analysts close to GTS agree that if it doesn't successfully restructure and sell off some of its businesses soon, it won't raise enough cash to stay in business another year. p> GTS, one of the major backbone operators in Europe, provides telecom services to businesses and other carriers over a nearly 11,000-mile network. Renowned financier George Soros owns about 6 percent of the company.

This year, after watching its share price freefall from a 52-week high of $36 to around (or below) $1, GTS announced it would restructure itself into four leaner, meaner business units: GTS Broadband Services; GTS Business Services; GTS Central Europe; and Golden Telecom.

GTS has already sold its 50 percent stake in Flag Atlantic, a trans-Atlantic cable provider, to Flag Telecom (Nasdaq: FTHL; LSE: FTL), its joint venture partner, for $175 million. It is now looking to unload Esprit, which offers telephony services, and it may sell its 60-plus percent stake in Golden Telecom, a holding company for various Russian telecom operators. (GTS got started in Russia under the name of San Francisco/Moscow Teleport Inc.)

According to its filings with the SEC, GTS injected $87.5 million into Esprit Telecom in 1999 and $193.8 million in the first nine months of 2000. And, though GTS's decision to default on Esprit didn't come as a surprise, the move was unsettling to those with financial ties to other European carriers such as Viatel Inc. (Nasdaq: VYTL) and RSL Communications Ltd., which have billions in outstanding junk bonds.

"Viatel has a very good network, but the problem is that they don't seem to get any revenue out of it," says one New York-based telecom analyst. "They may be able to stay in business longer than some carriers, but there are some fundamental problems with their business plan." Plenty of other European operators are in the same boat (see Letter From Europe).

As for GTS, the key to survival is in its selling off slow-growing businesses so it can raise enough money to continue operations, according to Merrill Lynch's Paterson. "Their [voice-focused] business services division hemorrhages cash, and if they can close that, they'll save themselves $160 million or more a year," he says. And, of course, it helps that GTS isn't putting money down a black hole by paying down on Esprit's debt.

"If [GTS is] able to focus the business and generate some cash by disposing of other businesses sufficiently, then it'll be in a relatively good position," says Paterson. "If it isn't successful, it could require easily more than a billion dollars [in additional financing]."

The worrisome thing is, should GTS make any more missteps, even vendor financing arrangements won't give it enough money to survive. Indeed, to many it's not a matter of whether GTS will go bankrupt, but when.

Since there's seemingly an oversupply of telecom gear and fiber and not enough paying customers, there's no reason for a potential corporate buyer to sweep in and bail out a troubled carrier, says Bryan Bigari, analyst at Fulcrum Investments, a Chicago-based hedge fund.

"If there's a buyer out there, they can either buy the bonds now while they're cheap, or wait until a bankruptcy and they'll get the assets anyway," Bigari says. "The longer buyers wait, the cheaper the stuff gets. You're going to see a lot of these carriers go under."

-- Phil Harvey, senior editor, Light Reading http://www.lightreading.com

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