Asia Global Crossing Ltd., a key asset of ailing Global Crossing Ltd., filed a Chapter 11 petition itself Sunday to reorganize its debt and sell its assets to a new venture formed by a Chinese telecommunications company.
The long-expected petition, filed in U.S. Bankruptcy Court in New York, would turn over control of 24,200 miles of a sophisticated underwater high-speed, fiber-optic network to Asia Netcom, created by government-owned China Netcom Communications Group Corp., for $120 million in cash.
Joining in Asia Netcom are venture firms Newbridge Capital and Softbank Corp.'s Softbank Asia Infrastructure Fund. Asia Netcom also would have a $150-million bank line of credit under the deal.
Asia Global listed $2.6 billion in debt and $2.3 billion in assets, both as of Dec. 31.
The deal, if approved by the court, would represent the first overseas investment by a Chinese telecom firm and one of the few investments by any government-run enterprise. Asia Global, based in Bermuda, owns or operates lines connecting eight Asian countries and the United States.
Asia Global was operated mainly out of Los Angeles, but since Global Crossing's bankruptcy filing in January, it has increasingly moved operations to Hong Kong. With few assets left in the U.S., Asia Global doesn't expect to need any federal regulatory approval for the deal. Of Asia Global's 425 employees, 17 are based in Los Angeles and will stay through the transition, which the company expects to complete by the end of March.
"We have been able to achieve our desired objective of ensuring our company's ongoing--and uninterrupted--operations in the future, without compromising customer service," said John M. "Jack" Scanlon, Asia Global's chief executive. "Once approved, this transaction will mark the successful completion of the restructuring process we began in early 2002."
Sunday's filing also is expected to sever Global Crossing's 59% stake that it has maintained in Asia Global since the unit's public offering two years ago. And it will put a major crimp in Global Crossing's available cash, which it needs to fund operations until it can emerge from bankruptcy.
Asia Global's $252 million of cash on hand amounts to about half of the parent company's total $557 million in cash at the end of September. Global Crossing has been running through about $60 million of its cash a month, according to operating statements it files with the Bankruptcy Court.
Also losing big chunks of Asia Global are Microsoft Corp. and the investment arm of Softbank, each of which holds a nearly 15% in the company. Asia Global's stock, traded over the counter, closed unchanged at 5 cents a share Friday. It has lost 96% of its value this year.
Relations between Global Crossing and Asia Global have grown increasingly tense since late last year, when the parent company hired the unit's chief executive and then refused to fund a promised $400 million in lines of credit for Asia Global.
Early this year, Asia Global embarked on a restructuring plan to cut costs and find new investors. It settled with two vendors over $266 million in overdue bills, though terms remained secret. It also raised $120 million in April by selling its share of three joint ventures to partner Hutchison Whampoa Ltd., giving the Hong Kong conglomerate a local phone carrier, an Asian data center and e-commerce operator ESD Services.
Hutchison, run by Hong Kong's wealthiest billionaire, Li Ka-shing, is one of two Asian firms that is awaiting federal and court approval to bring Global Crossing out of bankruptcy. Hutchison and Singapore Technologies Telemedia jointly bid $250 million for Global Crossing, whose bankruptcy filing in January was the nation's fifth largest.
In both deals, analysts say, Hutchison-STT and China Netcom are getting stellar assets for a pittance. And with an abundance of capacity on their systems, they said, the companies can easily swap space to complete worldwide networks.
"Global Crossing spent billions to build the network, and all Hutch has to do is operate it," said analyst Jay Pultz at research firm Gartner Inc. "Basically, it's a free network for Hutchison."
In picking up Asia Global, China Netcom will get a 12,120-mile network of undersea cables that link the largest business centers in Asia. A troubled partnership, Pacific Crossing Ltd., operates two lines that connect Japan to the U.S. But Pacific Crossing also is in bankruptcy, and Asia Global's stake probably will be wiped out. However, both Asia Global and Global Crossing could continue to use the lines under capacity agreements with new owners.
In a statement issued late Sunday, Global Crossing said that its "customers will not experience any changes in their service."
Asia Global has been focusing on selling communications and data services to customers in and around Asia. The company said about 80% of the region's fiber-optic network traffic travels among Asian nations.
The Asia Global-China Netcom deal comes at a time when Chinese political leaders, working to stoke the country's economy, are trying to promote Chinese companies and create a degree of competition in one of the world's largest markets for telecom services.
"China is trying to develop companies within the country and [previously] hasn't shown any great inclination toward overseas investments," said industry watcher David Webb, editor of Webb-site.com, an Asian telecom site.
Asia Global operates the most modern and extensive private network in Asia. Its lines carry voice and data traffic from California to Japan, China, Taiwan, Hong Kong, South Korea, Malaysia, the Philippines and Singapore. A major goal of the intra-Asia links, completed in August, is to provide more direct routes for voice and data, which in the past traveled first to the U.S. before heading back to Asia.
The operation is part of the worldwide network put together for more than $10 billion by Global Crossing under Los Angeles financier Gary Winnick.
The highflying telecom sector in the late 1990s made top executives wealthy beyond expectations. Winnick cashed in more than $575 million worth of Global Crossing stock before the industry began sinking last year.
As network builders, Global Crossing and Asia Global began transforming themselves into telecom service providers as demand was slowing and prices were plummeting. The subsidiary never accounted for much of the total revenue of the consolidated operation -- a mere 6% in September -- but it has been a big contributor to Global Crossing's losses, making up 22% of the parent's $138-million loss in September.
Pultz and others believe that Asia Global is "the key strategic asset" of Global Crossing. They figure that with a worldwide glut of capacity, falling prices and a stagnant industry, Asia Global has less competition and can charge customers more.
Some, however, doubt that Asia Global has much to offer the new Global Crossing under Hutchison-STT.
Companies bidding for Global Crossing last summer generally wrote off the stake in Asia Global, figuring the subsidiary would eventually go bankrupt to fix its own financial problems.
Besides, it's now cheaper to lease capacity than own and operate a long-haul carrier, experts said.
"Asia completes the picture for Global Crossing, but Global doesn't need it this year or next," said analyst Brownlee Thomas at Giga Information Group Inc. in Cambridge, Mass.
Hutchinson would have been a likely suitor for Asia Global. But Hutchison's owner Li is one of China's biggest private investors and close to the country's governing elite. Experts figure it was unlikely he would bid against a company controlled by the Chinese government.
"He's already cut his deal with the Chinese government," Thomas said. "Nobody's walking away from money. If the key to Asia is China, Li's trading for access to other opportunities."
More important, she noted, Global Crossing's main revenue stems from its North America and Europe lines, not the new Asia lines.
"I would have said Asia Global is a key element, but given the economic situation, with the recovery considerably slower than expected and war with Iraq making progress even slower, the business for Global Crossing is North America and Europe," she said.
But it's unclear what the effect will be on the industry from a price hike imposed by the Chinese government last week. Ignoring the world's telecom problems, China staggered the industry by raising the price for access to China's telephone customers from 2 cents a minute to 17 cents a minute. Webb, for one, doesn't believe that China can maintain such a huge increase.
In May, the Chinese government split up the monopoly held by China Telecom Corp., the national phone company. It created China Netcom to cover 10 provinces and gave China Telecom the remaining 20 provinces.
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Asia Global Crossing at a Glance
Business: Sells communications services and operates a fiber-optic network linking the United States, Japan, Hong Kong, Taiwan, South Korea, Malaysia, the Philippines and Singapore
Headquarters: Hamilton, Bermuda
Chief executive: John M. "Jack" Scanlan
Chairman: Jeremiah Lambert
IPO: Oct. 6, 2000, at $7 a share
Peak share price: $11.69
(intra-day) on Jan. 31, 2001
Current share price: 5 cents
Employees: 425, including 17 in Los Angeles
2002 revenue (9 months): $89.6 million
Major shareholders: Global Crossing Ltd. (58.9%), Microsoft Corp. (14.7%) and Softbank Corp. (14.6%)
Market capitalization: $29.1 million