Accounting Concerns May Slow Rush For Global Crossing Assets

By Marc Hopkins



WASHINGTON (Dow Jones)--Hutchison Whampoa Ltd.'s (H.HUW) pending $750 million investment in bankrupt telecommunications company Global Crossing Ltd. (GBLXQ) normally would have triggered bids from many in the industry willing to up the ante.


That would happen at least before the high-profile accounting woes of Enron Corp. (ENRNQ).


Analysts and industry experts say concerns surrounding Global Crossing's accounting practices and talk of inflated revenue likely will turn Hutchison, of Hong Kong, into the lone bidder. Hutchison already has a $400 million investment in Global Crossing convertible securities related to a Hong Kong joint venture.


"There was a time when someone said 'Chapter 11' and the assets would go quickly," said Jay Pultz, an analyst with Gartner Inc. "The deal is going to get a lot more scrutiny than in the pre-Enron period, but in that process, someone might emerge with a sweeter deal."


At stake are Global Crossing's fiber-optic cables buried under the Pacific and Atlantic oceans, making international communications possible in 27 countries spanning five continents.


The company's fiber-optic assets have been valued at $15 billion, and the $750 million Hutchison plans to put up for that package illustrates the deep discounts available to telecom companies once their competitors enter bankruptcy.


"They are important assets," Pultz said. "They are very large investments because it takes a lot of time to lay trans-Atlantic cable.At this discount, they are very attractive."


"This is a fire-sale economy right now," said independent telecommunications analyst Jeff Kagan. "You're seeing companies like NorthPoint snatched up by AT&T for pennies on the dollar."

In May, AT&T Corp. (T) acquired all of NorthPoint Communications Group's (X.NPC) assets for $135 million.


With more than $20 billion in assets, Global Crossing is the largest telecom provider to file for Chapter 11 protection to date. But it's been preceded recently in bankruptcy court by the likes of Teligent Inc. (TGNQE), Winstar Communications Inc. (WCIEQ), NorthPoint, PSINet Inc. (X.PIX) and Rhythms NetConnections Inc. (X.RNI). The high-priced assets of these telecom providers also sold at deep discounts, helping to spur the current wave of consolidation.


"It's very clear that there are too many players in the market, and Chapter 11 is sorting that out," said Pultz.


The promise of increasing demand for services such as high-speed Internet access and a host of Web-based applications fueled the ambitions of telecom start-ups duringthe late 1990s, but demand for these services didn't come fast enough.


Kagan said the telecom companies that are in bankruptcy now or that may be approaching it focused only on growth.The sector's healthy companies stayed committed to cash flow, revenue and customers."They didn't grow as fast and weren't as sexy, but they are surviving now," Kagan said.


Telecom companies that emerge from Chapter 11 in the U.S.are likely to engage in a new round of consolidation and will be forced to step up delivery of much-anticipated services to consumers to use the abundance of bandwidth that exists, analysts say.


"Bankruptcy is normally an indicator of bad corporate management, but ironically it frees up management and you don't have to make staggering debt payments," said Kenneth Carter, deputy director of the Columbia Institute for Tele-Information at Columbia University in New York.


According to Fitch Ratings, the 12 major telecommunications companies operating in the U.S. have combined debt of $250 billion as of Dec. 30.


"Historically, debt was a way of disciplining a company so that it pursued less-risky strategies and produced more predictable results," Carter said."But when you take that away, you create the incentive for management to be more risk-taking and entrepreneurial."


Kagan, the independent telecom analyst, adds that such tactics should foster growth in the industry, but so far companies haven't been able to establish a large enough customer base to use all they can offer.


"We have a timing problem," he said. "It's like building the nation's first highway when the first Model T was invented. We don't need it now, but we will."


Currently, there are only 10 million U.S. households hooked up to digital subscriber line, or DSL, service out of a potential 100 million, Kagan said."There is all this bandwidth waiting for customers to jump on," he said.


Gartner Inc.'s Pultz expects companies to use their newly acquired network capacity bought as bankrupt assets in ways that go beyond traditional local and long-distance service. He envisions the growth in application service providers leading to marketing of services such as data storage, virtual home tours, Web-hosting or unified messaging that would combine fax, voice and e-mail transmissions.


-By Marc Hopkins, Dow Jones Newswires; 202-628-7666;


(END) DOW JONES NEWS02-12-0207:01 PM