Global Crossing: We can work it out
Copyright 2002 The Deal L.L.C.
The Daily Deal…05/29/2002
Unhappy with a buy-out offer from two Asian companies, creditors of Global Crossing Ltd. plan to join the bankrupt telecommunications carrier in proposing a restructuring plan that would give them far greater control of the broadband provider's worldwide operations.
The company's proposal is intended partly to lure new bidders and to entice a better offer out of Hutchison Whampoa Ltd. and Singapore Technologies Telemedia.
Global Crossing said Tuesday, May 28, it would present a restructuring plan to a New York bankruptcy court after negotiations with its creditors and bank lenders, led by J.P. Morgan Chase & Co. The announcement came two days after Hutchison and ST Telemedia withdrew a preliminary offer to invest $750 million in Global Crossing in exchange for a 79 percent stake in a reorganized company.
Though details remain in discussions, the company and its creditors would most likely get a majority of Global Crossing's equity. Global Crossing and its creditors have been talking for weeks about a plan that would give them a larger stake in a restructured company than the 21 percent offered by the Hutchison-ST Telemedia proposal. It also is likely that a current Global Crossing customer or another telecommunications company could help finance the plan in exchange for a small equity stake.
"It is possible there could be a combination of financial investors as well as strategic investors that might like to take a position in Global Crossing in order to work more closely with the company," said Chris Nash, Global Crossing's director of corporate development. "This plan is intended to keep the auction process healthy and alive."
Integral to any plan would be raising at least $300 million to finance company operations until it becomes cash-flow positive. Though Global Crossing has lowered overhead costs since filing for bankruptcy in January, the company still spends more than it generates. The original Hutchison/ST Telemedia bid would have allocated about $450 million to creditors, the rest to company operations.
Global Crossing hopes that selling some noncore businesses could help it lower the amount of money needed to maintain its 27-nation, 100,000-mile network. The company said it has received proposals to sell its Global Marine Systems business, which lays underseas cables, a U.S. conferencing unit and Racal, its U.K. broadband network.
Though Hutchison and ST Telemedia had offered to make another $200 million line of credit available on top of its original offer, creditors wanted a greater equity stake in a reorganized company. Also, creditors refused to guarantee that the two companies would be eligible for a $30 million breakup fee should a competing bid trump their final offer, further convincing Hutchison and ST Telemedia to withdraw their preliminary bid.
Sources said it was still likely the two Asian companies would make a follow-up proposal by June 20, the bankruptcy court's deadline for bids. An auction is scheduled for July 20, but the company likely will ask the court to move deadlines for both the bids and a final sale forward by a few weeks.
The talks with Hutchison and ST Telemedia apparently soured because the Asian companies thought they were being asked to bid against themselves before the auction had begun, sources said. Meanwhile, the company and its creditors argued that Global Crossing had grown in value since the two Asian companies presented their takeover offer in late January as part of Global Crossing's bankruptcy filing.
The company said it is spending much less on operations than in 2001. Global Crossing said its operating expenses would fall 42 percent to about $900 million in 2002 from $1.55 billion in 2001, excluding its Asia Global Crossing Ltd. unit. As of April 30, the company said it had $913 million in cash, just slightly less than the $965 million the company reported having at the time of its filing with the U.S. Bankruptcy Court for the Southern District of New York. Part of the cost reduction came from lowering its employee base to 5,000 from more than 13,500 at the beginning of 2001 and 7,700 at the start of 2002. Global Crossing also said it would save about $100 million this year through office consolidation.
Global Crossing said it remains committed to keeping together the main pieces of its worldwide network: its U.S., European and Asian broadband network. However, a string of bankruptcies involving U.S. and European broadband providers has made it harder to value fiber-optic communications systems, said Stephan Beckert, a researcher at TeleGeography, a Washington, D.C.-based consultancy.
As examples, Beckert pointed to Williams Communications Group and Metromedia Fiber Networks Inc. in the U.S. and KPNQwest, Carrier One and Storm Telecommunications in Europe.
"It certainly makes it more difficult to price Global Crossing due to the fact that there are so many assets to choose from," Beckert said. "These bankruptcies also makes prospective buyers increasingly nervous about the market and more eager anxious to get a lower price."
Other bids for parts of the network are also possible. U.S. discount long-distance carrier IDT Corp. has shown interest in just buying Global Crossing's domestic operations, mostly the assets acquired when it bought Frontier Corp. for $9.86 billion in 1999. Some observers maintain that Hutchison and ST Telemedia may ultimately bid on only Asia Global Crossing, the company's largest unit.