Global Creditors In Costly Bind as Bids Disappoint
By ANTHONY PALAZZO
Staff Reporter
Bids submitted in the bankruptcy court auction of Global Crossing Ltd. have fallen far short of creditors’ hopes, raising the unwanted specter of a go-it-alone strategy for the money-losing telecommunications concern.
Such a last-resort move would require Global’s creditors, who already stand to lose more than $12 billion, to pony up more cash to keep the company afloat as it rides out the meltdown in telecommunications markets.
Another option is to break up the company and sell it in pieces; however, in a depressed market for technology assets, there doesn’t seem to be much stomach for that among creditors.
“It is more likely that the bondholders will either put money up themselves, or sell a portion of the reorganized equity to a minority shareholder,” said a source close to the bidding process. “It’s not likely it’ll be broken up in pieces.”
At least one of the bids would leave Global Crossing more or less intact.
Locally based brothers Tom and Alec Gores, whose separate technology buyout shops often are in competition on deals, have teamed up for a joint Global Crossing bid.
Spokesmen for the Gores brothers declined to comment.
A source familiar with the Gores’ bid said it provides higher overall value to Global Crossing’s creditors than a previous offer from two Asian firms, Singapore Technologies Telemedia Pte. and Hutchison Whampoa Ltd. In January, those firms offered $750 million for a 79 percent stake in Global Crossing, leaving creditors with 21 percent. They later withdrew their bid.
Another significant bid has come from Texas investor Richard Rainwater, the source said. However, few details of Rainwater’s bid were available, and it wasn’t clear whether it, too, would keep Global together.
Global Crossing could still sell itself in pieces. A number of parties have made bids for some of its assets. Level 3 Communications Inc., for instance, made a bid for Global Crossing’s Frontier operations, which deliver telecommunications services to business users. Level 3 recently received a $500 million investment from a Berkshire Hathaway Inc.-led group.
However, the source said that all of the bids received whole or partial were “on the fringe of what any (creditor) would do, or below what people would do.”
The paucity of bids made it more likely that Global Crossing restructuring would result in “some form of standalone going forward.”
The bids were delivered to Global Crossing’s financial adviser, Blackstone Group, on July 11. The auction was scheduled to be held on July 24, but the date has been moved to Aug. 7, said Global Crossing spokesman John De Bellis.
After Global Crossing declared bankruptcy in January, more than 60 companies expressed interest in its assets. But since then, there has been a wave of accounting woes at numerous telecom companies, most especially WorldCom Inc., where $3.8 billion in hidden expenses were discovered.
Global Crossing itself faces accusations that it engaged in sham “swap” transactions to raise reported revenues and cash flow figures. In the current climate, the figures it has presented to bidders are suspect.
“Because of the accounting irregularities, there’s a lot of question about what you’re getting,” said Lloyd Greif, president and chief executive of Greif & Co., a downtown investment bank.
These problems scared off potential buyers, both from the ranks of professional vulture firms and from larger players in the telecommunications industry, where Global Crossing’s worldwide network would otherwise have been a sought-after asset. No telecom-industry bidder attempted to buy the entire company.
Some good news
There is some sentiment that the negative climate has masked a few positive signals.
“The good news is the large number of successful reorganizations,” said Roderick S. Beck, a principal with telecommunications consulting firm Cwell in New York. “I don’t understand why the press has ignored these signs of renewed life.”
Beck pointed to financial restructurings at ICG Communications and Covad Communications, as well as the infusion of resources into Winstar Communications by its parent, IDT Corp.
Even so, telecom industry restructuring is proceeding faster in Europe than it is in the United States, said Stephane Teral, managing director of research firm RHK Inc. in South San Francisco. “The damage (in Europe) is not as bad as it is here,” he said.
At some point, Teral said, survivors will have to buy new equipment again because network traffic is still increasing at an 85 percent annual pace. “Nobody’s found a way to make money from data traffic but it has been increasing. A successful (Global) auction would be very positive news,” he said.
The Goreses are respected for their understanding of technology markets and their ability to combine savvy dealmaking with the specialized operational know-how.
“This would be a very big acquisition, and an important one (for the Goreses),” said Douglas Martin, vice president with Chanin Capital Partners. “Both of them have been successful in taking some tough, Fortune 500-sized assets and making something of them.”
Alec Gores, who runs Gores Technology Group, has had success buying distressed technology companies and turning them around. They include Learning Co., the software games business acquired from Mattel Inc. and sold last year, and Verifone Inc., the Santa Clara payment-processing company that received new capital in June after a Gores-led turnaround.
Data services expertise
Tom Gores has been concentrated largely in data services, where he’s cobbled together several large acquisitions to form NextiraOne, which has annual revenues of $2.5 billion. In a recent interview, he said that one reason for buying Global Crossing would be to offer its long-haul capacity to NextiraOne’s 500,000 business customers.
Gores acknowledged, however, that customers might not want to switch. “It’s a little speculative,” he said.
A source familiar with the Gores’ bid said it is a 50-50 partnership with no predetermined division of assets. Global Crossing wouldn’t immediately be combined with any other operations in the Gores’ portfolios, the source said.
Despite gobs of excess network capacity, Global Crossing is potentially in a unique position. RHK’s Teral, who tracks network usage, said Global Crossing is among just a handful of companies that can offer corporations seeking reliable data services on a single worldwide network. Of WorldCom’s customers, for instance, 75 to 80 percent use either Sprint Corp. or AT & T; Corp. networks as back-ups.
“If you see Global Crossing re-emerging, you may think twice” before signing up with Sprint or AT & T;, Teral said.
Of course, a WorldCom bankruptcy would cut both ways at Global Crossing. Even if WorldCom remained largely intact, it is so big that the sale of its non-core assets could overwhelm the pool of potential buyers, driving down the value of telecom assets.
“Restructuring has got to happen, that’s a given. Global Crossing is one of many. WorldCom, Qwest, probably all the long distance companies (will restructure),” said David Isenberg, an independent telecom analyst operating the Isen.com Web site. “It’s not generally accepted wisdom, but I think that trouble inside the local exchange companies will soon become apparent.”
The Gores brothers are certainly aware of these pitfalls, which is why they likely didn’t overreach for Global Crossing’s assets, Greif said. Nevertheless, a deal such as this if it comes off could do wonders for the brothers’ reputations.
“They’re not Little League players by any stretch of the imagination. This would put them in a whole new ball game,” Greif said.
On the other hand, acquiring Global Crossing and failing to turn it around would be a major setback. While there would be many excuses available hidden problems, misleading numbers if Global Crossing later went sour, there wouldn’t be much sympathy for excuses, since so many problems are known.
“That’s why the smart money has turned away from this transaction,” Greif said. “It’s a gamble, make no mistake about it.”
