Security Concerns Delay Chinese Buy Of Bankrupt Telecommunications Giant Global Crossing

For most battered companies struggling to climb back from bankruptcy, the biggest challenges are appeasing creditors and selling a judge on a viable plan for recovery.

But telecommunications giant Global Crossing Ltd. faces a separate, steeper hurdle: It has to persuade a secretive U.S. regulatory body that the company's reorganization plan isn't a threat to national security.

Indeed, Global Crossing's hopes of emerging from Chapter 11 could be dashed by U.S. officials who are questioning whether the company's proposed sale to two foreign investors poses security risks. At issue: Global's planet-circling fiber optic network, which is used by government agencies in the United States and other countries, and by major business interests worldwide.

The question of the company's fate could ultimately land on the desk of President George W. Bush -- and force the White House to make a decision with international political implications.

With so much at stake, Global and its would-be investors have mobilized top-tier trade and telecom lawyers and lobbyists to persuade an array of U.S. officials to sign off on the deal. Advisers working on the matter include Covington & Burling; Skadden, Arps, Slate, Meagher & Flom; and consulting firm Kissinger McLarty Associates.

The story of the campaign to secure U.S. approval of the Global Crossing sale offers a look inside an obscure regulatory procedure to inspect major business deals involving foreign investment.

To those familiar with it, it's called the CFIUS process. To most everyone else, it's a big unknown.

The Global Crossing negotiations with the Committee on Foreign Investment in the United States, or CFIUS, started last summer, when the deal was first announced, according to sources with knowledge of the discussions. But, these sources say, key U.S. officials, particularly at the Federal Bureau of Investigation, remain strongly opposed to the deal -- despite the efforts of Global's advisers and at least one key U.S. ally.

Representatives of the British government, which relies heavily on Global Crossing's network, recently told the company that they wouldn't thwart the transaction, and have been urging top-level U.S. officials to do the same, according to a British official in London.

In recent weeks, Global's advisers have sought to blunt U.S. security concerns by offering to seal off the company's U.S. network within a "secure subsidiary" controlled by people with national security clearance. While nominally headquartered in Bermuda, Global's base of operations is in the United States, where it operates a roughly 20,000-mile system of fiber optic cables.

On Feb. 7, Global submitted a 36-page document spelling out the technical details of that proposed plan to CFIUS, according to sources close to the negotiations.

The regulatory committee could signal as early as today whether it will approve the deal, sources close to the process say. If CFIUS doesn't approve it before Feb. 24, a statutory deadline, President Bush will be forced to decide the matter unless the parties withdraw their application.

Under a 1998 federal law, CFIUS, which now counts 11 representatives from several executive branch agencies as members, is charged with scrutinizing deals that mingle foreign investors and national security concerns.

The CFIUS process unfolds in near-total secrecy. The committee is formally composed of the secretaries of state, commerce, defense and treasury, along with the attorney general, the president's national security adviser, and the U.S. trade representative, among others. But beyond the identity of its members and a basic outline of its procedures, CFIUS releases to the public virtually no information about its activities.

"CFIUS is a black box," says one former State Department official who now advises companies facing the committee.

Indeed, many CFIUS member agencies would not even confirm that the Global Crossing deal is under evaluation, although the parties to the deal have themselves disclosed that fact.

Details of the proposed transaction have been public for months. Global's would-be investors are Hong Kong-based conglomerate Hutchison Whampoa Ltd. and Singapore Technology Telemedia Pte Ltd., a phone company controlled by the government of Singapore. Last August, they agreed to pay $250 million -- $125 million each -- for a combined 61.5 percent stake in Global Crossing.

The sale of control is viewed as crucial to Global Crossing's plan to reorganize and avoid liquidation. The sale has won approval from U.S. Bankruptcy Judge Robert Gerber of New York, who is overseeing Global's bankruptcy, and from regulators in the United Kingdom and the European Union, where Global also operates.

But within the U.S. government, the deal still faces stiff resistance from some CFIUS members and could ultimately be blocked, according to several sources close to the intensive negotiations now underway.

Global's advisers on the deal include Covington partners Stuart Eizenstat -- a former deputy treasury secretary and onetime ambassador to the EU -- and Mark Plotkin, a technology specialist, along with special counsel David Marchick, who represented the State Department on CFIUS matters as a deputy assistant secretary.

Global has also called in Ivan Schlager, a top lawyer-lobbyist and partner in the D.C. office of Skadden, Arps, along with Thomas "Mack" McLarty III and Nelson Cunningham, from D.C.-based Kissinger McLarty Associates. McLarty served as President Bill Clinton's chief of staff. Cunningham served as a lawyer in the Clinton White House and as an adviser to Clinton on Latin America.

Sources close to the negotiations say officials within the FBI and the Department of Defense have offered the toughest opposition to the transaction thus far. Their stated reason: concerns about possible ties between Hutchison Whampoa and the Chinese government. According to the same sources, those officials have not yet spelled out the basis for their concerns. Singapore's role in the deal appears to be noncontroversial, sources close to the discussions say.

A spokesman for the Treasury Department, which chairs CFIUS, declined to comment on any aspect of the committee's work.

At Defense, Assistant Secretary John Stenbit, who advises Secretary Donald Rumsfeld on communications and intelligence policy issues, declined through a spokesman to comment on the Global Crossing sale. FBI Deputy General Counsel Patrick Kelley, who is also involved in the CFIUS review of the Global deal, declined to comment.

A spokesman for Hutchison also declined to comment. Hutchison has retained W. Clark McFaddin II, a D.C. partner and trade expert at Dewey Ballantine, to lobby for the deal, according to a congressional lobbying report filed last August.

A Global Crossing spokeswoman declined to comment beyond a prepared statement: "We continue to cooperate with regulatory authorities in completing the approval requirements to consummate the transaction with Hutchison Telecommunications and Singapore Technologies Telemedia, and we are pleased with the pace of progress thus far."

The FBI has resisted foreign acquisitions of telecommunications assets in the United States in the past. In 2000, for example, the bureau initially balked at Deutsche Telekom's bid to acquire Bellevue, Wash.-based VoiceStream Wireless Corp. At the time, the German government owned a majority of Deutsche Telekom's shares.

That proposed deal also drew fierce opposition from Sen. Ernest Hollings, D-S.C., who railed against it at a September 2000 Senate hearing. In his testimony at the hearing, Larry Parkinson, then the FBI's general counsel, warned that the bureau's ability to conduct electronic surveillance could be compromised.

"Even where the foreign entity controlling a U.S. communications network is privately held," Parkinson added, "there is cause for concern that the foreign affiliated carrier may be subject to the influence and directives of the foreign government or others to compromise U.S. investigations and carry out ... intelligence efforts against the U.S."

The VoiceStream sale was ultimately approved, but only after strenuous efforts by Deutsche Telekom's advisers, including lawyers from Wilmer, Cutler & Pickering, succeeded in persuading the FBI that its ability to conduct electronic surveillance would not be hampered.

Under the so-called Exon-Florio provision of a 1988 federal law, CFIUS has 30 days to review Global's formal application for approval -- known as a "notice."

If the deal fails to win the committee's approval within that 30-day period, then by law CFIUS must pursue an investigation and report its findings to President Bush. Ultimately, the president must decide whether to approve or reject any deal that undergoes a CFIUS investigation. In all, the entire process must be completed within 90 days.

Lawyers who have guided companies through the CFIUS process say that as a practical matter, if a deal isn't approved by CFIUS within the 30-day review window, it's chances of surviving an investigation, and then a presidential determination, are significantly reduced.

To some extent, CFIUS experts say, that's because the parties in a deal that's headed for CFIUS review don't even file a formal notice until they've negotiated with members of the committee and determined that the deal will be approved. In many CFIUS cases, the application itself and the subsequent "review" are formalities.

In most cases, says Wilmer Cutler D.C. partner and CFIUS expert John Harwood II, "it will be virtually a done deal before you file it."

In fact, very few deals have been subjected to a CFIUS investigation, according to a recent report on the CFIUS process from the General Accounting Office. The GAO report, released on Sept. 12, 2002, found that of 320 deals "notified to the Committee" between 1997 and 2001, four were investigated, and only one was blocked by the president.

Experts say those numbers don't reveal a laissez-faire approach to national security. Rather, the experts suggest, the numbers reflect the fact that companies who confront the prospect of a CFIUS investigation typically withdraw their applications and either call off their transactions or significantly restructure them.

Global Crossing submitted its formal notice to CFIUS on Jan. 24, according to sources with knowledge of the filing. That means CFIUS must complete its review by Feb. 24 -- or the deal will face an investigation and, ultimately, a decision from a president who faces a war in Iraq and terrorist threats at home.

Sources close to the process say the White House has signaled that it wants CFIUS, not President Bush, to resolve the issue. Calls to the White House were referred to the Office of Science and Technology Policy, which did not reply to a request for comment.

According to sources close to the discussions, some of the government participants appear receptive to Global's latest plan, under which the company -- and its would-be investors -- would agree to wall off its U.S. operations within a separate subsidiary.

But at a Feb. 11 CFIUS meeting, the members were still unable to reach an agreement, sources familiar with the meeting recount. Another meeting, which is expected to be chaired by Deputy Treasury Secretary Kenneth Dam and attended by other officials at the deputy secretary level, is slated for today.

Some CFIUS experts predict that the pressure of geopolitics could very well scuttle the deal.

"There has long been a dichotomy between security interests and open investment interests" in the CFIUS process, observes Harris, Wiltshire & Grannis of counsel Cecil Hunt, who helped draft the rules that govern the committee.

"At the moment, we're certainly in a climate in which it behooves everyone in the government to be very careful" about security issues, Hunt says. "But you also have to be very careful to guard against reflexive reactions."

This is an article from about a year ago (Feb 2002), which mentions IDT as being interested in picking up some parts of Global Crossing at that time. Hadn't heard anything more recent.

The article is an interesting summary of creditors and some opinions of the deal at that time (some analysts thought at that time that the creditors were getting a very bad deal). The analysis is based on a $750M offer.

Wonder whatever happened to Lucent's claim that it was owed more (4x) than Global Crossing admitted to?

Link to year-old Global Crossing bankruptcy article

RIGHTING GLOBAL CROSSING'S SINKING SHIP

Toby Weber

Telephony, Feb 4, 2002

Asian dealmaker Li Ka-shing makes a play for submerged optical goods. Given his history and the sector's perilous state, odds are good he'd flip it.

At less than 5¢ on the dollar, the deal negotiated by Hutchison Whampoa and its chairman, billionaire Li Ka-shing, for the purchase of bankrupt carrier Global Crossing has the potential to produce massive gains. But whether those gains will be realized as a long-term investment or through a quick sale remains in question.

Made in partnership with Singapore Technologies Telemedia (STT), the proposed investment is the latest in a string of telecom ventures crafted by Whampoa, which has a history of buying stakes in communications companies and then flipping the equity for a sizable profit.

In 1999, for example, Whampoa sold its 44.8% stake in U.K. mobile carrier Orange to Mannesmann for $14.9 billion, and in 2000, the Hong Kong-based conglomerate executed a similar coup, getting $9.3 billion for selling its 18.4% of VoiceStream Wireless when the GSM carrier was purchased by Deutsche Telekom.

While a spokeswoman for Whampoa declined to comment on the plans for its latest proposed investment, analysts believe the company will seek a similar profit on Global Crossing. For $750 million, Whampoa would acquire a completed global network that cost $7 billion to construct and a controlling interest in more than $22 billion in assets.

The complexities of owning and operating such a network might dissuade Whampoa and STT from operating Global Crossing long-term, said Rudy Baca, global strategist for The Precursor Group. “They've seen that it's very difficult in this market to make money out of being a wholesale carrier,” he said.

In addition, it would be relatively easy for Whampoa to hold onto the assets for a few years, wait for an upturn in the undersea market and then sell the network — complete with customers — for billions in profit.

Such an upswing would enable several of the world's larger carriers to bid for the network, a move U.S-based incumbents might consider after they receive Section 271 approval to offer long-distance services.

“The RBOCs do look like good potential buyers,” said Michael Ruddy, managing director for Terabit Consulting. “Verizon definitely, because they've made significant investments in the undersea space over the last 20 years.”

GLOBAL CROSSING'S CREDITORS Some of the biggest names in telecom have stakes in the bankrupt carrier

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Lucent Technologies - $31,357,050*

Alcatel - $31,056,980

Tycom US - $29,160,213

SBC Communications - $26,840,151

Verizon - $23,963,607

Nortel Networks - $13,802,224

Cincinnati Bell - $13,357,868

Cisco Systems - $12,626,693

Level 3 Communications - $10,112,149

Source: Global Crossing

*Lucent has disputed this figure, claiming it is owed $123 million

But Whampoa has long-term holdings in the communications sector as well, many of which have synergies with Global Crossing's network.

Whampoa is a large equity holder in Asia Global Crossing, an Asian long-haul carrier 59% owned by Global Crossing. In addition, STT owns Singapore communications provider StarHub, which has formed a venture with Asia Global Crossing dubbed StarHub Crossing.

This web of relationships may have played a role in Whampoa's and STT's decision to pursue the investment, said Anthony Christie, vice president of business development and strategic planning for Global Crossing. “They have become familiar with our business strategy, our financial strategy and our operational strategy,” he said.

And protecting Asia Global Crossing would be of particular interest to Whampoa, said Patrick Comack, telecom analyst for Guzman & Co. “

If Global Crossing sinks, Asia Global Crossing is just another pan-Asian network, and it's not unique anymore,” he said.

Though the offer by Whampoa and STT might be defensive, the companies' low bid indicates they might be willing to risk losing Global Crossing.

The $750 million offer is considered to be slightly more than Global Crossing's liquidation value. For that amount, Whampoa and STT would receive a controlling interest between 60% and 80%. Existing equity holders — including Global Crossing Founder and Chairman Gary Winnick, who still owns 8.9% of the company — would see their investments wiped out by the deal. The creditors would split the cash and receive a mixture of new equity and new debt.

According to Comack, Global Crossing's creditors are getting less than what they should. “This was an awful, awful sale,” he said. “If I'm a debt holder, I don't take this deal.”

If such opposition arises, it could influence the bankruptcy court judge overseeing the case because U.S. bankruptcy laws are designed to protect creditors' interests. If debt holders believe they can do better, they may convince Global Crossing to liquidate or sell off assets in piecemeal.

THE 10 LARGEST BANKRUPTCIES (1980 to present)

Company Bankruptcy Date Total Assets Pre-Bankruptcy

Enron 12/2/01 $63,392,000,000

Texaco 4/12/87 $35,892,000,000

Financial Corp. of America 9/9/88 $33,864,000,000

Global Crossing 1/28/02 $25,511,000,000

Pacific Gas and Electric 4/6/01 $21,470,000,000

MCorp 3/31/89 $20,228,000,000

Kmart 1/22/02 $17,007,000,000

First Executive 5/13/91 $15,193,000,000

Gibraltar Financial 2/8/90 $15,011,000,000

FINOVA Group 3/7/01 $14,050,000,000

Source: http://www.BankruptcyData.com

In fact, a spokesman for Howard Jonas' IDT said the carriers had informal discussions with Global Crossing about the assets of Frontier Communications, Global Crossing's U.S. IP backbone. A spokeswoman for Global Crossing declined to comment but said the carrier is entertaining discussions with all interested parties.

At least one debt holder already is disgruntled. Lucent Technologies filed a petition with the bankruptcy court claiming it is owed $123 million, not the $31.4 million Global Crossing stated in its Chapter 11.

In addition to creating potential difficulties with creditors, the low offer could invite competition for Whampoa and STT in a bankruptcy auction, where interested buyers can offer to top the $750 million bid. But there is little consensus as to which company is in a better position to make a competing offer at this time.

At such a low price, Comack believes practically any major carrier could find the resources to top Whampoa's and STT's bid. But others believe the cost and nature of the network would make Global Crossing appeal to a smaller group. Terabit's Ruddy thinks likely bidders are those that already have some sub-sea assets but nothing as extensive at Global Crossing's 101,000 route-mile network — players such as Cable & Wireless, SingTel and Telefonica.

No matter what happens in the bidding process, said Ruddy, “whoever picks it up is getting a very good deal.”

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With additional reporting by Glenn Bischoff, Kevin Fitchard and Amalia D. Parthenios in Chicago.

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