Williams Winding Down?

Could Williams Communications Group (NYSE: WCG) be the next telecom services company to file for bankruptcy? That was the talk on Wall Street after the company issued its fourth-quarter earnings call this morning and announced that its banks have warned of a possible default on its credit agreement (see Williams Reports ).

Williams refuted the claim that it's headed toward bankruptcy, but agreed to submit a restructuring plan of its balance sheet to its lenders by February 25. The company wouldn’t reveal what the restructuring would involve, saying that it would disclose more, along with its guidance for 2002, on a separate call on February 13. Observers, however, say the company will probably try to sell more non-core assets first but that, in the end, bankruptcy seems inevitable.

“I would imagine that the restructuring will involve debt for equity with the bonds,” says RBC Capital Markets analyst David J. Bank. “There’s a pretty good chance that bond-holders will end up owning the company."

Such a scenario would amount to a takeover of the company and would likely render its common stock virtually worthless, which is what happened at Global Crossing Ltd. (NYSE: GX) (see Global Crossing Falls Overboard).

Williams, however, denied that it intended to seek bankruptcy court protection, blaming the recent negative developments in the overall industry for the banks' sudden mistrust of its abilities to follow the terms of the credit agreement.

Executive vice president and CFO Scott Schubert said on the call that he expects Williams to be successful in lowering its debt levels, which stood at $5 billion at the end of the third quarter.

"In the past, we’ve always executed on what we’ve said we’re going to do,” he said. "I expect that at the end of 02 we’ll have less debt than at the end of 01, and that at the end of 03, we’ll have less debt than at the end of 02.”

In the meantime, the market pounded Williams stock, which lost nearly one-third of its value, dropping $0.42 (29.58%) to $1.00.

The company's claims apparently did not reassure a market already shaken by the recent bankruptcy filings by Global Crossing and McLeodUSA (Nasdaq: MCLD) (see Global Crossing: Telecom's Enron? and Carrier Pile-Up Claims McLeodUSA ) -- not to mention the plummeting stock of Williams competitors like Level 3 Communications Inc. (Nasdaq: LVLT), Qwest Communications International Inc. (NYSE: Q), and WorldCom Inc. (Nasdaq: WCOM).

In response to the call, Kaufman Bros. LP downgraded Williams’s shares this morning to Accumulate from Strong Buy. Vik Grover, the analyst who wrote the note, said he still believes Williams is a good company, but that with the concerns over default conditions, along with the lack of 2002 guidance and the plans for restructuring the company’s balance sheet, a downgrading was necessary. Kaufman Bros also placed its Williams price target under review.

"This debt issue is suffocating not just the company, but the whole space," Grover says. “It’s really disappointing what’s happened to the industry. It’s almost unstoppable. Another soldier appears to be in the hospital."

The good news for Williams today was that the company managed to meet its fourth-quarter guidance by increasing revenue and its customer base and reducing its net loss. Still, few observers believe the numbers will help the company avoid a bankruptcy filing.

The company reported total revenues of $330.3 million for its fourth quarter, ended on December 31, 2001, up 11 percent from the third quarter, and 28 percent from its fourth quarter a year ago. At $302.8 million, network revenues were also up 11 percent over last quarter, and up 36 percent over the year-ago quarter. Williams had predicted that the network revenue would grow by 10 to 20 percent quarter-over-quarter.

With 353 customers, the company reported a 20 percent growth in its customer base from its third quarter. Company officials also hinted that Williams would be announcing a major new customer in a couple of days. The customer, observers say, is probably WorldCom.

In addition, the company’s net loss has continued to decline. For the fourth quarter, Williams reported a net loss of $372 million, or 76 cents per share, down from $546 million, or $1.18 a share in the same quarter a year ago.

While the company’s EBITDA (earnings before interest, taxes, depreciation, and amortization) improved 43 percent over last quarter, with a loss of $12.8 million, down from a loss of $22.5 million, observers point out that these improvements didn't arise through improvements in gross margin -- which declined during the quarter -- but through substantial SG&A expense cuts.

“We think this trend line, though not necessarily significant, could raise doubt as to the company’s EBITDA trajectory,” Kaufman's Grover writes in his note.

“They appear to be hitting guidance,” Grover says. “But their stock is still melting. People are most interested in what’s happening with the debt.”

— Eugénie Larson, Reporter, Light Reading
http://www.lightreading.com