DSL Firm Covad Plans to File for Bankruptcy

Covad Communications Group, a struggling provider of high-speed Internet access, said it plans a prepackaged bankruptcy filing this month to wipe out $1.4 billion in debt in an attempt to save the business.

Though some analysts say this might help Covad survive, others note that Covad is yet another large telecommunications company struggling to compete against the near-monopoly of Pacific Bell, Verizon Communications and other local phone companies.

Santa Clara, Calif.-based Covad, with 330,000 customers nationwide, is among the largest of the nation’s new wave of telecommunications companies to head for bankruptcy protection.

Covad would become the third independent provider of high-speed Net service to land in Bankruptcy Court in the last year.

Last week, rival digital subscriber line provider Rhythms NetConnections filed for bankruptcy protection. Earlier this year, NorthPoint Communications pulled the plug on DSL service to 120,000 users, including about 43,000 people and businesses in California.

But Covad stressed Tuesday that it has no plans to shut down its nationwide network.

The company’s recovery plan includes convincing its bondholders to accept a deal that would pay them 19 cents for each $1 of face value of its debt and shares convertible into a 15% equity stake in Covad.

Charles Hoffman, Covad’s chief executive, said most bondholders already have agreed to the plan. If all goes as planned, the company would enter Bankruptcy Court in mid-August with enough cash to stay afloat through the end of the year.

For the March 31 quarter, Covad reported a net loss of $198.5 million, or $1.15 a share, compared with a loss of $136.3 million, or 93 cents a share, a year ago. But Covad’s revenue more than tripled to $71.2 million from $20.8 million. The company has not yet reported second-quarter results.

Hoffman said Covad plans to raise about $200 million in additional funds to run the company until it begins profitable operations in the third quarter of 2003 due to cost-cutting, lower debt payments and rising sales.

“It’s not easy competing with these [local phone companies] . . . but we’re nothing like NorthPoint and Rhythms. We have a lot more customers, and we have great partnerships,” Hoffman said.

Analysts applauded Covad’s move as a necessary step to give the company a chance of surviving into next year.

“This is good news and probably a smart business deal for Covad,” said Dave Burstein, editor of DSL Prime, an online newsletter. “It also means they probably already have an investor or a buyer up their sleeve.”

Others aren’t so sure the deal is enough to save Covad--or DSL competition in general.

“This plays into the hands of the Baby Bell [phone companies] and the cable providers [selling high-speed Net service],” said Ben Macklin, analyst at EMarketer Inc., a New York-based research firm. “In DSL, the [PacBells] of the world will be dominating.”

SBC Communications, the parent company of PacBell, owns more than a 5% stake in Covad. It took the equity position last year as part of a wide-ranging deal that also disposed of several pending lawsuits between the two rivals.

Until that settlement, Covad had been a leading critic of PacBell and other phone companies, alleging they have blocked Covad’s progress through anti-competitive behavior.

In May 2000, an arbitration panel ruled that PacBell must pay Covad $27.2 million in costs and damages for obstructing Covad’s DSL service in California.

Though the phone companies deny any wrongdoing, most analysts believe the incumbents have not played fair with their rivals.

“The foot-dragging on the part of the [Baby Bells] is a big factor in the [competitors’] inability to survive,” said John Navas, a communications consultant in Dublin, Calif. “These horrendous losses of competition can be said to be the fault of companies being badly managed and pretty much going down the drain of their own accord.

“But when you see just about everybody going down . . . this stretches the bounds of coincidence.”