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Struggling
through debt
Telecom can't come back until
it straightens out its finances
by Robert Burke
Once upon a time, Teligent, a Vienna-based fixed wireless
firm, was a poster child for Virginia's 1990s telecom
boom. Today, even the vultures don't seem to have much
enthusiasm for picking over its remains.
Teligent has been looking for a buyer
since it went into bankruptcy in May and thought it
had found one. The Teligent Acquisition Corp., formed
solely to buy the firm and funded by still-unknown sources,
agreed to pay $117.5 million for Teligent's assets.
But the mid-October sale was delayed when the buyer
told a bankruptcy court in New York that it needed more
time to raise the cash.
In many ways Teligent is emblematic of what went wrong
with the explosive growth of the telephony market, especially
in broadband. Like other telecom providers loaded with
venture funding and IPO proceeds, it raced to get big
fast and spent millions building its fixed-wireless
network of antennas in 43 markets. With former AT&T
president Alex Mandl as its CEO, the young company had
investors swooning: Teligent stock traded at nearly
$100 a share in March 2000 and the company had a market
cap of $6 billion. Then the bottom fell out. Investors
lost their appetite for building broadband networks
and Teligent, like many others, couldn't raise the money
to keep going. Its stock dropped below a dollar. Mandl
left in April after New Jersey-based IDT Corp. bought
a third of its shares and took over the board of directors.
In May the company filed for bankruptcy, listing a whopping
$1.65 billion in debts.
Call it a euphemism but the 'restructuring'
currently reshaping telecom is just a polite way to
refer to the layoffs, bankruptcies and wiped-out investments.
Teligent's fate will likely be shared by others. Amid
the rubble, though, there are real assets - like Teligent's
network, pared down now to 11 cities. The original investors
in Teligent have taken huge losses, but if a new Teligent
emerges, it could have far better prospects than the
old one. It would be fully funded and debt-free, with
customers and an experienced management team on board.
For the survivors in telecom, the task now is holding
on until the gloom lifts. "The business opportunity
is still there. The market demand is as strong as ever,"
says Thomas Cady, CEO of Broadstreet, a Pittsburgh-based
telecom provider with customers in Richmond, Hampton
Roads and metro Washington. "Those companies that
can run their businesses very responsibly, there's a
future for them."
For now, though, times are tough and there are few cheery
predictions. Last year's hopes that the telecom slump
would be short-lived are gone. In September the Friedman
Billings Ramsey Group in Alexandria released a 73-page
report predicting sharp drops in revenue and spending
in the telecom sector and an industrywide recession
until 2003. "It's been rocky and bloody,"
says Rob Carlson, senior analyst with Current Analysis,
a telecom research firm in Sterling. "A lot of
companies are in survival mode, trying to make do with
what they've got."
Unfortunately, what many have got is debt, the kind
that pulled Teligent down. Herndon-based telecom provider
E.spire Communica-tions, for example, defaulted on about
$1 billion in junk bonds when it filed for Chapter 11
bankruptcy protection in March. It has yet to announce
its plans to restructure. The company did not return
calls seeking comment. Voice and data services company
XO Communica-tions of Reston raised $250 million earlier
this year but is carrying $5.2 billion in long-term
debt. Suffocating debt is not only scaring away investors
but chasing off customers who don't want to put their
networks in the hands of a company in bankruptcy court.
The survivors will be those who act aggressively to
pare themselves down to a profitable core while persuading
stockholders - banks, equity investors, bond holders
- to share the pain. "Everybody's going to have
to compromise a little bit," Cady says. "Holders
of the debt may have to take less than a dollar for
a dollar ... there has to be some pretty significant
restructuring of the debt."
In a last-ditch effort to patch cash-flow
and regain investor confidence, some telecoms are buying
back debt themselves - at a steep discount. McLean-based
Primus Telecom-munications, for example, spent $88 million
between April and July through to retire $386 million
of its $1.12 billion in outstanding bonds. In August
XO Communications reportedly took steps to spend about
$250 million to retire debts with a face value of $800
million. The company didn't return telephone calls seeking
comment.
Analysts say debt buy-backs are risky: They may boost
cash flow by lowering interest payments, but they deprive
companies of cash they need to operate. BB&T Capital
Markets analyst Ryon Acey says bankruptcy is probably
the only way for XO to restructure its debts. "If
you have a funding gap of nearly $1 billion and you're
already leveraged to the hilt, what do you do? I think
it's just a matter of time," he says. Increasingly
companies are starting to realize that, he says. "They
think time is on their side but time doesn't wait for
everyone. The Grim Reaper is at the door and he's rung
the bell about three times. Somebody's going to have
to answer it."
One answer to the money woes of struggling companies
is to get bought, but few potential buyers have the
cash on hand, Carlson says. Buyers are probably better
off to wait anyway. "There's no compelling reason
to buy a [telecom company] right now when you can wait
for them to go out of business and buy their assets
for 10 cents on the dollar."
Cady of Broadstreet says small and medium firms might
do the mergers and acquisition themselves to form a
stronger company if the bigger telecom players can't
step up. Waynesboro-based nTelos is one example. In
July it announced plans to buy Conestoga Enterprises,
a Pennsylvania-based telecom provider with service area
just north of nTelos' Virginia and West Virginia operations.
The $335 million deal, if closed around year-end as
planned, would create a company with 550,000 customers
and $1.6 billion in assets. Last year nTelos merged
with R&B Communications. nTelos CEO James S. Quarforth
said in a statement that the mergers reflect "our
commitment to continued expansion of our core wireless
business segments."
Established telecoms are showing more stability than
the start-ups that tried to get big fast. Mississippi-based
WorldCom, for example, which has a major presence in
Northern Virginia, in September announced plans to pay
$40 million for the DSL assets of bankrupt Rhythms NetConnections,
a Colorado-based telecom that serves many of the 31
major urban markets that WorldCom already serves, including
Washington, Philadelphia and New York City. Likewise,
Verizon Communications Inc. formed, in part, from old
baby bell Bell Atlantic, is a favorite buy of stock
analysts.
In the wake of the Sept. 11 terrorist
attacks, though, few companies are talking about expansion.
Business travel is way down since the attacks and that
may help some telecom firms, says Current Analysis analyst
Peter Gerrick. "Though this is not the way they
wanted it to come to them ... there are going to be
a lot more people doing teleconferencing and video conferencing."
A relative bright spot in telecom is
wireless, where debt is less of a problem. Major carriers
such as AT&T Wireless, Cingular, Reston-based Nextel
Communications and Verizon Wireless "are doing
all the right kinds of things to move forward and be
long-lasting companies," says Eddie Hold, who follows
wireless firms for Current Analysis. An example: Nextel
stock rose nearly 30 percent in September when it announced
it would upgrade its existing network rather than migrate
to a more expensive network used by other wireless carriers.
That will save $3 billion over three years, one analyst
said.
Next year might bring good news for the major wireless
providers. Hold says the FCC is expected to lift a cap
it placed on how much spectrum a single provider can
control in a market. It was designed to spur competition
but once lifted it will let the bigger wireless carriers
acquire small competitors and increase their coverage.
Also on the plus side: new handsets that support Java
programs and new, faster networks coming out next year
from companies such as Cingular and Sprint PCS. There
is uncertainty, though, whether wireless carriers can
successfully market these faster and fancier devices.
"The question [consumers ask] is, 'So what do I
do with it?'" Hold says. "You've got to show
[users] some applications that make it worthwhile. That's
still lagging."
The rest of the telecom industry may
have little to smile about. Carlson of Current Analysis
says telecom providers are finding "they have to
get more deeply into the value-added services. Things
like Internet access, managed Web hosting, stuff they
can sell with the assets they have in place." A
lot of telecom executives sound like Broadstreet's Cady,
who says: "Our focus is just on executing in those
cities where we do operate and kind of weathering the
storm, if you will, until the opportunities become a
little clearer."
There are few ports in this storm, though. The national
economy is slipping toward recession, spurred by the
Sept. 11 terrorist attack, and companies in many sectors
are struggling. Telecom firms feel it worse because
they were in such bad shape anyway. Susan Kalla, an
analyst with Friedman Billings Ramsey, predicts the
next two years will bring a "major restructuring
of service providers, where financial buyers pick up
the assets of distressed players 'on the cheap' and
restart the business with using a conservative, limited,
and focused business model." That's what the people
still with the beleaguered Teligent are hoping for -
a chance to start over.
Return
to Virginia Business - November 2001
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