Metromedia Fiber likely to unravel
Copyright 2002 The Deal L.L.C.
The Daily Deal…06/04/2002
Bankrupt Metromedia Fiber Networks Inc. is preparing to begin negotiations this week with its creditors and bank lenders to eliminate more than $ 4.5 billion in debt through the sale of unprofitable parts of its fiber-optics business.
Rather than emerging from bankruptcy, as much as it looked May 20 when it filed for Chapter 11 protection, the White Plains, N.Y., company is more likely to sell parts of its broadband business that keep losing money while retaining pieces that generate a positive cash flow. Companies such as McLeodUSA Corp. and ICG Communications Inc. have executed similar plans, reshaping themselves into smaller companies, but able to finance their debts.
Sources close to Metromedia Fiber's bankruptcy process said that while other telecommunications carriers have expressed interest in parts of the broadband provider's network, all have stopped well short of bidding for the entire company.
For Metromedia Fiber, investors' generally negative view of telecommunications companies complicates raising new money or finding a buyer. Global Crossing Ltd., Williams Communications and Flag Telecom Inc. head a long list of telecom providers unable to maintain operations without court protection.
"Because capital markets have all but stopped funding investments in telecommunications, companies and investors that might still be interested in Metromedia are going to have a very difficult time raising the money to do a deal," said Vince Tobkin, a Bain & Co. telecom banker.
Metromedia Fiber did not return repeated calls for comment.
If, as expected, Metromedia Fiber attempts to convince its bank lenders, led by Citicorp USA, and bondholders such as Verizon Communications and Goldman, Sachs & Co., to a debt-for-equity restructuring, the company would likely have to raise new money to continue operating until its business became profitable.
But Metromedia Fiber has never been profitable and with more companies building and leasing fiber-optic lines in metropolitan areas, it has many more competitors than in past years. More broadband capacity combined with less demand for telecom services has produced lower rates across the industry, making revenues even harder to generate.
"It's not clear that Metromedia Fiber has any assets that it can leverage into significant revenue anytime in the next three years," said Tom Nolles, president of CIMI Inc., a telecom consultancy in Voorhees, N.J. "The company needs to be acquired, but who is going to buy it when it has a such a large debt?"
One possible suitor is Verizon, which owned 6.6 percent of the company's equity and continues to use parts of its network. But Verizon is more likely to buy only select pieces of Metromedia's national network. A Verizon spokesman would not comment on the company's plans.
For Metromedia Fiber, any restructuring plan will require winning back the confidence of its original investors, a group that agreed in October to participate in a funding package that was supposed to stave off bankruptcy.
Just three weeks after Sept. 11, Metromedia Fiber succeeded in convincing a coterie of big-name investors to give $611 million in cash and credits to fund the fiber-optic provider's growth and operations. Though the negotiations often seemed on the verge of collapse, investors ultimately put aside their jitters about the market in general and telecommunications in particular to support Metromedia Fiber.
One big reason Citicorp USA, Verizon and Nortel Networks Ltd. elected to back Metromedia Fiber was the reputation and deep pockets of the company's billionaire controlling partner, John Kluge. As the public face of Metromedia Fiber and owner of a 26 percent stake, Kluge agreed to purchase $180 million in convertible debt as part of the financing package.
But even with fresh funding and a new management team, Kluge's Metromedia Fiber stumbled throughout the winter, unable to make a series of interest payments on existing debt. In May, the company was forced to file for bankruptcy, a move that left some of its earlier investors sour.
This spring, Salomon Smith Barney Inc., like Citicorp USA, a unit of Citigroup Inc., resigned as the company's financial adviser and UBS Warburg replaced it. Kronish Lieb Weiner & Hellman LLP was hired as the company's legal adviser. In March, Verizon and its Internet transport affiliate, Genuity Inc., terminated contracts with Metromedia Fiber.
With telecommunications still an uncertain investment, the same investors that contributed to the company's fall financing package are taking a more jaundiced view of Metromedia Fiber. Much attention is certain to focus on whether Kluge decides to take a greater financial role in the company's future.
"Unless Kluge tries to be a stalking horse, who's going to give them money after the way they treated Wall Street?" asked Vik Grover, a telecom analyst at Kaufman Brothers LP. "The company could very well end up being divided into many pieces."
Chadbourne & Parke LLP is representing Metromedia's creditors committee; Clifford Chance Rogers Wells of Washington is representing the bank group.