Staying the Course

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The collapse of its majority owner has left Asia Global Crossing Ltd. scrambling to find new sources of financing and to speed up a business plan aimed at connecting Asian countries with a single fiber-optic system and providing data networking services.

Asia Global was expecting a $400-million cash infusion from Global Crossing Ltd., which owns 59% of the Beverly Hills company. But Global filed for Chapter 11 bankruptcy protection in late January, putting the subsidiary in a financial bind. Asia Global was counting on the funds to help it move from a network builder to a provider of data services over the lines it owns or leases.

Last week, the company acknowledged that it is talking with 19 investors, which reportedly include a group of four companies ready to invest at least $250 million for a controlling stake in the company. And billionaire Li Ka-shing’s Hutchison Whampoa Ltd., already a shareholder, said it may make a bid for the cash-strapped operator of undersea communications cables.


Meanwhile, Asia Global expects a “material loss” for the fourth quarter. It delayed the release of fourth-quarter results as it assesses the effect of $232.6 million in devalued assets and federal investigations into the accounting practices of Global Crossing.

Even as the company struggles financially, Asia Global executives are hiring 100 salespeople and 50 engineers in Asia to help transform the existing staff of 450 into a provider of communications products ranging from private lines and Internet access to sophisticated systems such as virtual private networks, or VPNs.

It operates a U.S.-to-Japan cable and has nearly completed a system connecting Asian countries from Korea to Singapore, partly through lines it acquired in swaps of capacity with other carriers. In such swaps, Asia Global used excess capacity on its cable instead of cash to buy space--called indefeasible rights of use, or IRU--on other cable systems.

Such IRU swaps are at the heart of the investigation into Global Crossing, which was accused by a former executive of improperly boosting revenue by failing to report accurately the expense of acquiring the IRUs.

Asia Global’s chief financial officer, Stefan Riesenfeld, says the subsidiary has followed generally accepted accounting practices in recording IRU swaps. But for now, he and other executives are busy shoring up the company’s prospects, distancing it from Global Crossing and insisting that it can survive without its parent company.

Question: How far along are you in talks with potential investors?

Answer: We’ve sent out information on a nondisclosure basis to a significant number of people who were interested in understanding more about Asia Global Crossing. The level of discussion obviously varies across that spectrum. And at this stage it’s probably not appropriate to comment on exactly how far along we are with the various individual parties or to name any of them specifically.


Q: How long do you expect this process to take?

A: We are hopeful that we will get some pretty strong indications of where we are within the next 60 days.

Q: Do you have enough money to last that long?

A: At least. We really see our funding being sufficient to get us through the majority of this year. So we don’t feel this type of time frame is any issue at all relative to liquidity.

Q: Despite financial problems, you’re going on a hiring binge. How are you able to hire so many people?

A: It’s really what I refer to as reprofiling. As we transition from the construction of the cable to a focus on recurring services revenue, obviously you need salespeople to fuel that growth. At the same time, you probably don’t need as many of the people with the skill sets that were appropriate to the prior stage of the company. [The company already has fired about 25 construction workers in Asia.] We have always said that services are going to be the long-term future of this company. Under the circumstances, the IRU market, or the wholesale capacity market, is not as robust as people would have thought, and that has caused us to accelerate the roll-out of our services and to focus more on intra-Asia services.

Q: By recurring services revenue, do you mean the data products, everything from private lines to VPNs?

A: Yes. As we look forward, we probably expect a bit less than two-thirds of our business to be on the private line side of things. What we’re really focused on selling are simple, straightforward products. Part of the reason is that the markets we serve are not as far progressed, in terms of value-added services, as you might see in the United States or in Europe.


Q: How much revenue are data products bringing in?

A: We’re growing from starting this business from scratch in the third quarter of 2000. Last year, our data services revenue was about $80 million [and maintenance fees on the lines added $20 million]. This year, we’re projecting considerably more than $100 million in revenue with very rapid growth thereafter.

Q: You want to accelerate your business plan, but what do you need to make it work?

A: I think we need to have the right people. And we have been successful in attracting a number of new people to the company in the last three to six months. These are people who have a strong background building exactly the recurring revenue businesses we’re building. For instance, Bill Barney joined us from WorldCom, and he had grown WorldCom’s data services business from very small levels to quite extensive levels over a short period of time.

Q: Were they concerned about joining a company beset by such financial problems?

A: I think most people joining the company now recognize we have challenges, and that means we also have opportunities. So I think people see this as an exciting plan to be part of. And I think one of the decisions that has made this easier is that these are people who have worked together before. You not only have to have confidence in the market, you have to have confidence in your team.

Q: Global Crossing had committed to providing $400 million in financing but couldn’t do it. How has the loss of that money hurt operations?

A: In the last six months, we’ve had a combination of a slowdown in the wholesale IRU market and then the ramp-up of our services business. We’re unfortunately caught in this position that though we think our services business will grow rapidly--you can’t start services until your cable system is fairly far evolved--we are fairly early in that cycle. Therefore, this is a peak financing time.

Q: How much money do you figure you’ll need and where do you think it will come from?

A: We need a few hundred million dollars, and I don’t want to be too specific. The interest we have seen [from investors] is fairly broad. It’s a combination of what you might call strategic investors and some financial investors.


Q: What effect does a majority owner in bankruptcy have on the company?

A: I think our biggest concern is simply the customer destabilization. Any time you are related to a company that has visible financial issues, you have to work hard to keep your customer base informed of what the implications are on your company and as comfortable as they can be with the situation. [They need to know] you will continue to be a provider of services that they can rely on. We think we can offer that.

Q: Have you lost customers because of the bankruptcy?

A: We have not lost any significant customers because of that.