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Financial

Williams Goes Into Chapter 11

Williams Communications Group filed for bankruptcy protection in a New York court today (see Williams Negotiates Chapter 11) -- letting down shareholders who were assured only a couple of months ago that this would never be necessary.

The firm is the holding company of ailing carrier Williams Communications, which has been struggling with cash flow problems for months now.

Williams has roughly $6 billion in debt it can't service. It says it's been negotiating with its top creditors and has gotten them to delay any action to retrieve their funds until the carrier comes up with a restructuring plan for them to vote on. That should happen by July 15, 2002, though if the carrier meets certain unspecified conditions, the vote may be extended until October 15, 2002.

Williams's leading creditors include the Bank of New York, to which Williams owes $2.53 billion, and its original parent Williams Companies, which spun off Williams Communications last year and has a $2.27 billion claim with the carrier. There is also a wide assortment of bondholders and a $1.3 million claim by the New York Stock Exchange waiting in the wings.

Williams says the filing issued by the holding company won't affect the ongoing provision of day-to-day domestic and international services by the operating carrier. "It's an important distinction that needs to be made," says spokeperson Deborah Trevino.

Analysts say Williams can't hide behind such bravado anymore. "In effect, they're saying to customers, please don't stop buying from us, even though we're in bankruptcy," says Chris Roberts, senior research analyst for Tejas Securities Group Inc. He thinks the upshot of Williams's filing today will be "100 percent ownership by the bondholders, zero for the shareholders."

Roberts isn't alone in his assumption. Back in March, a report by the Optical Oracle, Light Reading's subscription service, stated: "Management tried to convince investors that a restructuring will not materially dilute current equity shareholders... But this is implausible, since every other such restructuring in the telecom services sector has diluted equity investors to nearly nothing."

What happens once all parties reach an agreement on the reorganization of Williams Communications' debt isn't yet clear. The company could be sold, or it could issue a new round of shares on the public markets.

Meanwhile, Williams Communications shareholders have started suing (see Williams Slapped With Lawsuit). Sources say the leading bondholders are likely to fight among themselves as well, although in a statement today, Williams Companies CEO Steven Malcolm said: "Williams plans to continue to participate in constructive dialogue with the other parties in the hopes that WCGR can work through and emerge from the bankruptcy process in a fashion that yields the maximum possible recovery."

Today's filing was no surprise: Williams is only the latest of a string of unfortunate carriers (see Carrier Bankruptcies in Full Bloom). The handwriting's been on the wall for some time, despite ongoing denials and protestations by Williams Communications executives.

Back in February, for instance, the financials looked alarming and talk of bankruptcy surfaced, even though Williams Communications CFO Scott Schubert denied that the carrier would ever need to go to bankruptcy court (see NSS Names CEO). In March, the New York Stock Exchange barred the carrier from further trading because shares had fallen below a penny for more than 30 days (see NYSE Boots Williams Comm).

— Mary Jander, Senior Editor, Light Reading
http://www.lightreading.com

Editor's Note: Light Reading is not affiliated with Oracle Corporation.
DoTheMath 12/4/2012 | 10:31:01 PM
re: Williams Goes Into Chapter 11 But NEVER to such an extent. This is, as far as I know, the BIGGEST FINACIAL SCREW UP in history.

.....

A lot of folks STAYED OUT of the stock market after listening to a little known fella named Allen Greenspan talk about "irrational exuburance" and noting the similarity to the early 90's Japanese Economic Bubble.

--------------------------------------------------

Precisely. I believe the reason is the way this whole thing was financed with debt, and yet the stuff the debt was financing had a shelf-life of 3, may be 5, years. This explains the pennies on the dollar people are recovering now.

If you recall the S&L crisis in early 1990s, the mess didn't end up costing the government as much as originally feared. The loss estimates reached $300 billion, but the final tally turned out to be $150 billion. Reason? The real estate market recovered sufficiently for the government to recover decent money on the foreclosed assets. Some commentators even opined (after the fact) that if the government had waited rather than dump all the property at depressed prices, the losses would have been even lower.

No such luck in telecom this time. The losses are never going to be recouped because it is backed by equipment that is obsolete already. So I would argue it is really the bad financing structure that led to such a violent cycle in telecom.

I am one of the folks who stayed out of the market. In the past 4 years, the first time I bought any stock was in the post Sep 11 lows. I could never justify the crazy valuations people were paying before that time. The valuations are still not reasonable, especially for big companies, across the board.
GW Pearson 12/4/2012 | 10:31:02 PM
re: Williams Goes Into Chapter 11 Of course, the boom and bust cycle, based just as you say an overcapacity, has happened before.

But NEVER to such an extent. This is, as far as I know, the BIGGEST FINACIAL SCREW UP in history.

At least, so far...

Another funny thing we hear today from analyst is that "Nobody knew it was a bubble at the time."

This is simply not true. A lot of folks STAYED OUT of the stock market after listening to a little known fella named Allen Greenspan talk about "irrational exuburance" and noting the similarity to the early 90's Japanese Economic Bubble.

Not everyone lost money in the deal.
DoTheMath 12/4/2012 | 10:31:12 PM
re: Williams Goes Into Chapter 11 How can so many smart people end up being involved in the largest economic mis-step (so far) in history? I'm talking about the entire $1.5T+ telcom wipe out, of which WCG is only a part.

-----------------------------------------------------
If it makes anyone feel better, this situation is not restricted to telecom. Real estate, PC companies, dot coms, pizza restaurants, supply chain software companies, internet routers ... you name the category, this phenomenon of overbuilding followed by contraction, has occurred.

When any new vista of opportunity opens up, and potential demand exceeds available supply, the optimal individual response is to get in on the bandwagon. Collectively that produces overcapacity. I don't know how this can be fixed without taking away some fundamental freedoms.

The bad thing about telecom is that it has combined long cycle debt, with (emerging) short cycle obsolescence. Real estate has no obsolescence, so long cycle debt is OK. Software companies have high obsolescence so they don't get financed by debt. People mistakenly assumed that telecom assets are long lived. True for fiber in the ground, absolutely untrue for telecom capital goods. So the cycle is more violent in telecom. Lessons will be learnt, the next cycle won't be as bad.
GW Pearson 12/4/2012 | 10:31:14 PM
re: Williams Goes Into Chapter 11 How can so many smart people end up being involved in the largest economic mis-step (so far) in history? I'm talking about the entire $1.5T+ telcom wipe out, of which WCG is only a part.

Each business plan seems, in and of itself, probably had merit, based on the prices people were fetching for long haul compared to the new efficiencies in transport equipment (DWDM, Ultra-Long Haul systems, etc.) So, each business plan, individually, looked like a pretty smart idea.

But, taken as a whole, the creation of 14 (or so) brand spanking new nationwide long distance companies was an incredibly dumb idea, at least for the original investors. This isn't to say that the country won't eventually use everybit of that capacity. What was missing from the "collective" business plan, so to speak, was an appreciation of something Adam Smith and Karl Marx agreed on hundreds of years ago.

I think it's called SUPPLY & DEMAND.

What gets me confused is how such a fundemental principle was ignored by so many business school genisus. I mean, as an engineer, if I tried to tell people that basic physics no longer applied, I think there would be a lot of skepticsim.

The fact that so many people decided to ignore basic economic principles comes close to looking a lot like the way cults operate. (oaky, I confess, I'm also a sociologist.)

It seems that the belief in optical networking really did approach religious levels.

Funny, eh?
DoTheMath 12/4/2012 | 10:31:23 PM
re: Williams Goes Into Chapter 11 Our company just struck a corporate deal for wireless. We get pooled minutes across the company, with long distance included. Overall it works out to about 6 cents a minute. Juicier still, calls within the plan are free (i.e not calculated in the minute consumption). Given that these are sales guys or field engineers calling headquarters etc consituting about 40% of the calls LONG DISTANCE, this is a better deal than wireline.

So much for "lucrative" enterprise customers.
plumpy 12/4/2012 | 10:31:26 PM
re: Williams Goes Into Chapter 11 That someone shopping is probably SBC. Why do they need an IP free, commodity pipe supplier (no pun intended) ? They can shop and get much more (FON, T, WCOM, ???).

And they don't need to go to armpit Tulsa and stay in a smelly Adams Mark hotel to get business done...

py
GW Pearson 12/4/2012 | 10:31:34 PM
re: Williams Goes Into Chapter 11 Consolidation is for sure the next phase. Someone is going to go shopping real soon. IMO
GW Pearson 12/4/2012 | 10:31:35 PM
re: Williams Goes Into Chapter 11 Short of finding an amazingly large pot of gold they can use to pay off their debt, this is the only reasonable way to get their financial house in order.

In the long run, it looks very much like the WCG "spin off" has come full circle to become a "spin-back-on", with WMB picking up 42% of the company.

Neat trick...
optical_man 12/4/2012 | 10:32:10 PM
re: Williams Goes Into Chapter 11 Author: fiber_diet Number: 10
Subject: Re: People are in denial, bandwidth is nearly free Date: 4/24/2002 1:40:05 PM
Long distance is included in your wireless plan. So you are getting it essentially free. This is something you could not get 5 years ago. Also, look at the number of minutes you are getting today vs 5 years ago. I think the Sprint plan is now up to around 4000 minutes including long distance for $39/month.

Fiber,
think you're missing my original point.
(excluding all taxes/fees below)

Home phone is $15.00. LD is a nickel/minute. Use 500 minutes of LD and you pay $40.00 for both local and LD. (let's exclude road warriors here, just think residential, enterprise users)

Wireless is around the same per month. $40.00 for local and LD. Where are the cost savings for wireless? Plus if you go over your minutes, you quietly get nailed for .40/minute and up. Also, it's a yearly contract you must buy (or pay $150.00 to get out), and in 5 months when better plans come along, your stuck.
zweisel 12/4/2012 | 10:32:14 PM
re: Williams Goes Into Chapter 11 The problem is not that the prices have collapsed per se but rather because the volumes slowed down such that economies of scale were not fully realized.
zweisel 12/4/2012 | 10:32:14 PM
re: Williams Goes Into Chapter 11 The problem is not that the prices have collapsed per se but rather because the volumes slowed down such that economies of scale were not fully realized.
fiber_diet 12/4/2012 | 10:32:15 PM
re: Williams Goes Into Chapter 11 Long distance is included in your wireless plan. So you are getting it essentially free. This is something you could not get 5 years ago. Also, look at the number of minutes you are getting today vs 5 years ago. I think the Sprint plan is now up to around 4000 minutes including long distance for $39/month. I saw another plan/service which now included web browsing as part of their standard service.

My point was that the prices are plunging and long distance is included. I did not say bandwidth is free. My guess is you will continue to see 'bonus' minutes and additional services like web browsing included. Since long distance is included, what does this mean for AT&T who once relied heavily on long distance revenue?
optical_man 12/4/2012 | 10:32:19 PM
re: Williams Goes Into Chapter 11 Fiber,
I'm still at a loss to rationalize paying $50-70.00/month for unlimited wireless minutes and calling it free.
I I use 400 minutes and divide by $50.00 that pretty much equals what my ATT bill would be.
I don't consider 50.00 to be free, just semi-hidden.
optical_man 12/4/2012 | 10:32:19 PM
re: Williams Goes Into Chapter 11 Author: fiber_diet Number: 2
Subject: Question about remaining carriers Date: 4/23/2002 7:57:10 PM
Alternately, say Williams is focred to sell out at say 10c on the dollar. Wouldn't someone be acquiring a cheap entry cost from Williams to compete with the other debt loaded carriers?

2 issues w/ buying for 10cents on the dollar. The creditors will 1) want you to assume all the outstanding debt, and if you or anyone else won't agree to that, then the creditors will ask for liquidation.
billy_fold 12/4/2012 | 10:32:19 PM
re: Williams Goes Into Chapter 11 I seriouly doubt that Howard Janzen and Matt Bross and the rest of the crew have a clue how to run a carrier. (How many engineers does it take to turnup a SONET LTE?, huh Howard?) (He might be able to tell how to change out a pipeline valve.)

Regarding Chapter 11, I for one will never own Williams Comm stock again. You know what they say, "Fool me once...."

billy
fiber_diet 12/4/2012 | 10:32:21 PM
re: Williams Goes Into Chapter 11 When you look at what has transpired over the last two years, you will see that bandwidth is nearly free and continues to get cheaper.

Then, you have the wireless folks who are giving away nearly unlimited minutes which includes long distance. This has probably put a dent in the carriers revenue stream.

As suggested earlier, there is just way to much capacity available. But, I also doubt we will see anything in the nearterm that would allow carriers to RAISE prices either.
srh 12/4/2012 | 10:32:24 PM
re: Williams Goes Into Chapter 11 >Does it seem plausible that say Williams emerges >from bankruptcy and restrustures its debt that >Williams will be at a competitive advantage over >the other carriers?

Take a look at their 10-K, even if their debt payments (around $600K/year) were erased, Williams still lost money on their operations.

Also note that Williams after raising and spending over $8.5B, they declared $3B of these investments as "impaired" at the end of the year. There is a real question of what is there is at all useful, and if it can it be operated profitably, even if you get it "for free".
zweisel 12/4/2012 | 10:32:27 PM
re: Williams Goes Into Chapter 11 Sure, and the screwed shareholders will rally behind this company and give them their money. Chapter 11 is NEVER a good thing. Period.
PantomineHorse 12/4/2012 | 10:32:28 PM
re: Williams Goes Into Chapter 11 "Does it seem plausible that say Williams emerges from bankruptcy and restrustures its debt that Williams will be at a competitive advantage over the other carriers? Then this being the case, in order for other carriers to compete, wouldn't they be wise to do the same to level the playing field?"

This is the biggest fear -- that the industry is caught in the type of downward spiral you are alluding to.

No capacity (supply) reduction, since these are all Chapter 11 reorgs. Competition -- not reduced. Absolutely no pricing power available.

Having worked on behalf of mid-to-large enterprises negotiating long-term contracts with carriers, the story is actually worse than what is commonly portrayed.

Where's the legislative branch rewriting industry rules? What happened?

It'll be interesting to see how all this plays out.
fiber_diet 12/4/2012 | 10:32:31 PM
re: Williams Goes Into Chapter 11 Does it seem plausible that say Williams emerges from bankruptcy and restrustures its debt that Williams will be at a competitive advantage over the other carriers? Then this being the case, in order for other carriers to compete, wouldn't they be wise to do the same to level the playing field?

Alternately, say Williams is focred to sell out at say 10c on the dollar. Wouldn't someone be acquiring a cheap entry cost from Williams to compete with the other debt loaded carriers?
GW Pearson 12/4/2012 | 10:32:34 PM
re: Williams Goes Into Chapter 11 Down the road a bit, Chap-11 may turn out to have been, overall, a good thing for Wil-Com and it's customers.
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