Global Sale Not a Sure Link to Survival

Global Crossing Ltd.’s deal to be acquired by two Asian conglomerates is a critical first step to salvaging the telecommunications firm, but the company’s survival is far from a sure thing.

The fiber-optic network operator is losing money, the telecom market still suffers from brutal competition and overcapacity, and the deal with Hutchison Whampoa Ltd. and Singapore Technologies Telemedia doesn’t add one penny to Global Crossing’s coffers.

Instead, the $250 million pledged by the investors--plus an extra $50 million of Global Crossing’s own cash--would go directly to the company’s bank creditors, a group of institutions that has called the shots since Jan. 28, when the telecommunications firm filed for Chapter 11 bankruptcy protection.

The buyout plan represents a surprisingly stingy payback for Global Crossing’s banks and other creditors, which are owed more than $12 billion. But the deal gets worse if Global Crossing falters after exiting bankruptcy, especially for non-bank creditors that got new debt and equity in the restructured firm instead of cash.

John Legere, chief executive of Global Crossing, said his company has slimmed down enough for its operations to move into the black on an operating basis (before income taxes, depreciation and amortization) by the end of the year and to post net profit toward the end of 2003.

“We’ve got a good, strong business,” Legere said. “The reason we’re even in this position today is because of what we’ve been able to do over the last 10 months in restructuring the company, keeping customers intact, stopping the cash burn and lowering dramatically the cost structure of the business.”

Patrick Comack, a telecommunications analyst at Guzman & Co., isn’t convinced. For starters, he said, Global Crossing is tainted by ongoing investigations into the company’s accounting by the Securities and Exchange Commission, the FBI and others.

“Global Crossing’s brand has been damaged beyond repair ... and demand for wholesale [network capacity] has fallen off a cliff,” said Comack, whose firm does not own shares or do banking business with the telecom company.

Bermuda-based Global Crossing owns a fiber-optic communications network that connects 27 countries and more than 200 cities, and its business plan was based on selling capacity on the network to other carriers through multiyear wholesale contracts.

Barring a surprise resurgence in wholesale demand, Global Crossing would have to rely on its ability to sell connections and data services directly to large corporations. That could be difficult in the wake of the bankruptcy filing last month by telecom giant WorldCom Inc., which has left corporations more skittish about entrusting critical communications to a carrier on the fringe of solvency.

“Even if your costs are lower [after bankruptcy], if you don’t have more customers coming onto your network, eventually you end up back in bankruptcy,” said Ken Twist, director of the global telecom strategies group at RHK Inc., a telecommunications consulting firm in South San Francisco. “There’s not enough demand to keep all these companies afloat.”

Twist and others said Global Crossing’s post-bankruptcy staying power will depend on its cash balance. The company’s most recent financial report showed it had $857 million in its bank accounts at the end of June.

A Cash Challenge

Global Crossing’s sales fell nearly 5% in June and the company posted an operating loss of $118 million. But because the loss included large noncash items, the firm managed to boost its cash balance by $17 million.

That performance will be hard to maintain if losses continue in the $100-million range and revenue keeps falling. In addition, company funds could be reduced by big nonoperating expenses such as pending settlements and professional fees related to Global Crossing’s bankruptcy case, lawsuits and the accounting investigations. In June, those fees ballooned to $20 million.

The pending deal with Hutchison and ST Telemedia would give the two firms a combined 61.5% stake in the new Global Crossing, but the agreement states that the companies have no obligation to provide the venture with additional funding.

Canning Fok, managing director of Hutchison, told reporters in Hong Kong last week that Global Crossing won’t need more outside money. “They have enough cash flow generated within the company,” Fok said.

Under the agreement, Global Crossing would retain its 58.5% ownership of Asia Global Crossing, a separately traded affiliate that operates a fiber-optic network connecting key countries in the Pacific Rim. Asia Global’s operations, though unprofitable and relatively small, are considered more valuable than the other portions of Global Crossing because the Asian lines face less competition and serve a market in which demand has merely flattened instead of plummeted.

The Asian subsidiary, which is not in bankruptcy, is entertaining buyout and investment options to shore up its balance sheet after Global Crossing reneged on an agreement to lend the unit $400 million. It is unclear what role Global Crossing’s new owners would play in determining the fate of Asia Global.

Until earlier this year, Hutchison and ST Telemedia were partners with Asia Global Crossing in several ventures. Hutchison also owns less than 2% of Asia Global, a spokesman said.

But absent a strong financial commitment from Hutchison and ST Telemedia--either through Global Crossing or as a separate investment--the Asian unit could be forced into filing for bankruptcy protection. That scenario, which is not prohibited under the publicly available sections of the Hutchison-ST Telemedia agreement, could wipe out Global Crossing’s equity stake in Asia Global, leaving only a commercial network-sharing agreement between the two firms.

For now, Legere is focused on Global Crossing. He believes that the strong ties to Hutchison and ST Telemedia--both conglomerates with substantial telecommunications holdings--will provide the company with stability and a pipeline to valuable new corporate customers. Legere and Fok have said Hutchison probably will use Global Crossing’s network to carry data-rich wireless services from Hutchison mobile phone units.

But Global Crossing’s new owners also may trigger scrutiny from Washington lawmakers and regulators leery of letting U.S. communications networks be controlled by foreign companies or by governments that don’t allow U.S. firms into their domestic markets.

Some politicians worry that Hutchison, which is controlled by Li Ka-shing, a Hong Kong billionaire with close ties to the Chinese government, might monitor the communications traffic flowing through Global Crossing’s network at the behest of Beijing officials.

Global Crossing’s customers have included the State and Defense departments, although Pentagon officials canceled a $450-million contract with the company this year because the agency’s rules prohibit doing business with a company in bankruptcy.

No evidence has surfaced to suggest that the Chinese government would be a direct investor in Global Crossing, but Federal Communications Commission officials privately have indicated they probably will review the deal to determine whether it is in the public interest.

Meanwhile, Rep. Dana Rohrabacher (R-Huntington Beach) has said he will ask the House Committee on Government Reform to hold a hearing on the issue as soon as next month.

Raising Questions

Li “is part of an inner circle of investors that has direct ties to Chinese officials in Beijing,” said Aaron Lewis, Rohrabacher’s spokesman.

“Our suspicion is that [Li] is a conduit for the Chinese government to exercise control over the company. And we think it’s a good idea for the [U.S.] government to take a look at that,” Lewis said.

That move could attract support from powerful lawmakers such as Rep. W.J. “Billy” Tauzin (R-La.), chairman of the House Energy and Commerce Committee. Tauzin has said that “foreign government ownership raises concerns about national security” and fair competition in the marketplace.

“His position is that he isn’t concerned so much about foreign company ownership, but he draws the line at foreign government investment or control,” said Commerce Committee spokesman Ken Johnson.

ST Telemedia spokeswoman Laura Kline said the two companies are “confident in the transaction” and have pledged that they will “work with the appropriate governmental and regulatory bodies to address any concerns they may have.”

With the U.S. telecommunications industry in collapse, Kline said, “I think Congress is more concerned that its major telecommunications companies stay solvent and that their employees have jobs.”

Federal law prohibits the transfer of communications licenses held by a U.S. firm to any company that is 20% or more directly owned by a foreign company or foreign government. There is a similar limitation on indirect ownership. The FCC, however, may grant a waiver of the latter provision if the agency determines a deal is in the public interest.

In addition, under the Cable Landing License Act, the FCC and State Department have the authority to grant, withhold or put conditions on communications licenses to operate undersea cable “directly or indirectly connecting the United States with any foreign country.”

An FCC spokeswoman declined to comment, and no State Department official could be reached for comment on how the federal law would apply to Global Crossing’s licenses.

A spokeswoman for the General Services Administration, which administers a multibillion-dollar contract under which major U.S. carriers provide telecommunications services to federal agencies, said Global Crossing is not excluded from doing business with the federal government. The company still is listed as a vendor providing telecommunications services to the Defense and State departments.

Some agencies, including the FBI and Defense Department, also may have a hand in determining the outcome of Hutchison’s proposed deal with Global Crossing, experts say.

Although Global Crossing officials have expressed confidence that the proposed deal will pass government scrutiny, the thicket of government regulation and oversight could delay the transaction, derail it outright or add significant financial or regulatory conditions.

There’s one other potential irritant: The Hutchison-ST Telemedia deal specifies that the restructured Global Crossing be organized “under the laws of Bermuda or the Cayman Islands.”

In recent months, U.S. lawmakers have railed against companies that skirt U.S. taxation and more stringent laws by keeping their headquarters in tax-friendly locales such as Bermuda.