Global Crossing Sells for $250M

AP ^ | 10 Aug 02 | Bruce Meyerson

[KC Burke]

NEW YORK (AP) — Once worth tens of billions of dollars, Global Crossing is being sold for $250 million to the same investors who only months ago agreed to pay three times as much for the world's most extensive fiber-optic network.

The agreement announced Friday with Hutchison Whampoa of Hong Kong and Singapore Technologies was approved by the judge overseeing Global Crossing's bankruptcy case.

The deal provided startling proof of how fast the business of fiber-optic networks continues to disintegrate in an environment poisoned by the WorldCom accounting scandal and a global glut of capacity for Web traffic and e-commerce.

It also appears that Global Crossing's lenders and creditors made an extremely costly miscalculation in holding out for a better payoff on their debts, which totaled $12.4 billion when the company filed for bankruptcy in late January.

An outside financial adviser to Global Crossing who was called to testify at a hastily scheduled hearing early Friday said only three credible bids had been received during a lengthy auction process and that bidders were spooked by the ongoing collapse of the business.

``It's a very difficult world today in the telecommunications industry,'' said Arthur Newman, the adviser, a senior managing director for the Blackstone Group.

Under the original deal with the two Asian firms, announced in January with the bankruptcy filing, Global Crossing's debtholders would have split $300 million in cash and an additional $800 million in new notes from the company.

Now they'll still get $300 million in cash, but only $200 million in notes. They will, however, retain a larger stake of the equity in the new firm: 38.5 percent rather than the 21 percent envisioned under the earlier deal.

Meanwhile, although Hutchison and Singapore will receive a smaller controlling stake — 61.5 percent instead of the 79 percent stake rejected in the first deal — they will only being paying $125 million each in cash rather than the combined $750 million they were willing to pay in January.

Owners of Global Crossing stock will receive no stake in the reorganized company.

Lawyers for Global Crossing on Friday told the court that the company expects to file a Chapter 11 plan of reorganization in September and to emerge from bankruptcy in early 2003, subject to satisfying various contractual and regulatory conditions.

Global Crossing, which was founded by investment banker Gary Winnick in 1997, piled up its debt building a vast worldwide communications network at the height of the Internet boom.

That state-of-the-art network spans 100,000 miles, connecting more than 200 cities in 27 countries around the world.

The system includes 20 percent of undersea bandwidth connecting the United States with the rest of the world, according to the telecom research firm TeleGeography.

One of Global Crossing's most valuable assets is its 59 percent stake in Asia Global Crossing, which operates unrivaled fiber-optic links between Japan, Taiwan, South Korea, Singapore, Malaysia, the Philippines and potentially China.

The Bermuda-based company had hoped to dominate the market for high-speed data communications, and at one point, enthusiastic investors boosted the company's value to nearly $50 billion

While few networks compare in size, the building frenzy of the past few years left a glut of capacity that forced down prices for bandwidth.

At the same time, the collapse of the Web economy eliminated a driving force for the explosion of online traffic that Global Crossing and its rivals were counting on to jam their networks.

Still, even in the current environment, the flow of Web usage and electronic commerce continues to grow at a steady clip.

That reality explains why certain players seem willing to buy Global Crossing's assets for what amounts to a steep discount from their origin al cost, but a hefty price tag nonetheless.

[Sweet Hour of Prayer]

Who is the judge that was overseeing Global Crossing's bankruptcy? What do we know about him/her?

[tortoise]

I don't have a clue about all this except--I thought one of the big deals about fiber was that so much more could be carried so mush faster than by regular cable. It doesn't take as much to carry a lot more. Is that true?

Fiber is worth a lot more than copper any way you slice it. The reason the fiber market collapsed isn't because fiber isn't valuable but because the market was ridiculously over-built by top-heavy companies, so the companies couldn't amortize the investment. The bandwidth market has never grown less than 100% annually (including now); the problem was that many of the original owners of these networks assumed 1,000-2,000% annual growth. In any other industry, 100% annual growth would be considered fabulous. The companies that are buying up these assets at fire sale prices are going to make a mint. Global Crossing just sold for $2500 per fiber mile (never mind all the infrastructure gear that was probably acquired at the same time), which amounts to insanely cheap bandwidth. If you think fiber is too expensive, I challenge you to buy a backhaul that fast for ten times that price per mile.

There are two reasons fiber is where the money is at. First, fiber bandwidth is embarrassingly cheap per megabit. And if you buy fiber already in the ground, you can light an entire metropolitan area for about $100k and selling the bandwidth will allow you to recover your entire investment (network plus equipment) in about a year. Everything beyond that is pure gravy; my company (in which I am a major investor and chief systems engineer) buys abandoned fiber rings for peanuts and turns them cashflow positive in a few months. Second, fiber scales as bandwidth needs increase. If you want to increase the throughput of your fiber (e.g. by a factor of ten), just plug in a different laser system at a cost of maybe $10-20k per ring.

Fiber is a brilliant investment by these 2nd generation fiber network providers. The sheep are running from fiber investments because of problems at big companies which has pushed down asset values far below even the most cynical book values; we're talking about buying hundreds of miles of core backbone fiber in major metropolitan areas for $50k because nobody wants to buy them. You make way more profit in a single month off a segment like that than the entire network cost. They are acquiring the distressed assets for so cheap, and operating the networks so cost efficiently, that it would bankrupt the telcos to even try and compete in the big bandwidth business. And unlike the badly managed companies that put all the fiber in the ground in the first place, many of the 2nd gen players have no significant debt and are operating comfortably in the black.

Only a person unfamiliar with the business would consider the Global Crossing fiber to be a bad investment. Hell, my company would have bought it in a heartbeat if we could pony up that kind of cash. Fiber is definitely profitable right now if you are lean, efficient, and aren't carrying a monumental debt load. And in some cases, it is grossly profitable beyond all reason. What you'll probably see over the next several months is the merging of all the relatively small 2nd gen providers into much larger goliaths. The best time to invest is always when the market looks the worst.

[tortoise]

Sounds like I should stay away from communications companies invested heavily in fiber. Is that correct?

No, absolutely not. Only stay away from companies that invested in laying the fiber in the first place. Companies that are acquiring distressed fiber other companies put in the ground are going to make a fortune. Realize that most of the fiber networks that are being sold today at these bankruptcy proceedings (of which there are a lot these days) are being sold for 1-3% of the cost it actually took to build them. They get all the benefits of fiber and none of the initial capital costs.

[Chemnitz]

Fiber has a great future but we are way overbuilt now and we do not have homes connected to it.

I was in Cisco class with a retired utilities guy. He left after the first semester because he was offered $100,000 a year to supervise the laying of fiber optic in Texas. One can only guess the cost per mile with money like that thrown around.

[tortoise]

He left after the first semester because he was offered $100,000 a year to supervise the laying of fiber optic in Texas. One can only guess the cost per mile with money like that thrown around.

Compared to the direct cost of laying fiber in the ground (and the insane government hoops you have to jump through), the wages of the fellas laying the fiber is insignificant. My company is experimenting with bypassing the Last Mile right now (with quite a bit of success), but the telcos are going to fight tooth and nail to not be obsoleted. We are hooking up test communities now -- symmetric dedicated multi-megabit bandwidth to each and every residence (with no restrictions on use or sharing) at the cost of a normal DSL line. And lots of other good stuff that would blow your mind still under wraps. There is an embryonic revolution underway that will radically shift the price/performance of media and communications, but the FCC/telcos/government are doing their part to make sure it doesn't happen. Ubiquitous high-speed networking is no longer intrinsically expensive, its just made to be that way.

[MississippiMan]

The phone companies would lose their collective butts if our homes were connected by fiber. Therefore, you have none, and the fiber world collapsed.

Bravo. Here's someone who understands the game. BTW, I was writing IPO coverage reports when Global Crossing Asia (?) went public a couple of years ago. It stank to high heavens; amazing what information was there to find in the filings of these companies, like these incredible sweetheart deals that everyone is now so incredibly concerned about. Believe me, no one cared when IPOs were popping 500-1000% on Day One.

MM

[flamefront]

I come up with the 100,000 miles costing 50 cents a foot for the installed high bandwidth network ocean cables.

Dirt cheap.

[Chemnitz]

I'm sure you are correct. The telcos are good at protecting their turf. I believe that demand for huge bandwidth (home and business alike) will propell this forward. I wish you the best in your plans. Do you also think Wi-Fi will help bypass the telcos and their precious copper?

[Southack]

"I come up with the 100,000 miles costing 50 cents a foot for the installed high bandwidth network ocean cables. Dirt cheap."

So cheap it's almost worthless. Sorta like a run-down neighborhood where 90% of the homes are unoccupied, you just don't get much interest from buyers.

Well, 90% of fiber is unused. The business plans that fleeced the fiber investors were all junk. It was a fad. People who had done little more in life than hear the word "fiber" sunk big bucks into dot-com style "looks good on paper" scams.

So we've had our fiber boom and we've had our fiber bust.

The true-believers will gamble that existing fiber assets are worth owning - to be prepared for a future land/fiber rush.

They may even be right, but I wouldn't gamble my money on them.

Buying last years technology, in the hopes that it will be worth something MORE in five years is a bad bet that runs against Moore's Law.

Technology after all only gets cheaper, so why buy now when 90% of fiber can't produce any revenue?

[Brad C.]

Well said, friend!

It is hard for me to imagine that any major carrier would miss out on buying such a network for pennies on the dollar. The amount of money that will be made from this deal is staggering. I wonder why they let it go so cheap and without any apparent bidding.

Bill Gates could have bought this with pocket change, and probably didn't even consider it.

[Brad C.]

I think you need to look at this in a slightly different way. I would agree with you that it is over built, but not to the extreme proportions you lay out.

I have no idea where you live, but let's say you live in a typical surburban neighborhood with single family homes. Say there are 20 homes on the block in which you live, and each home has from 2 to 6 people living in it. Stop to think just how many miles of copper wire are used to provide those homes with basic electrical service. Wires to each and every outlet, switch and light fixture. Now how much of that wire is actually "lit" at any given time?

A couple might have a few lights on while watching the TV, with the air conditioner running in the background, probably using only 1 or 2% of the "cable" resources they have available to them. A larger family will naturally have a lot more going on, but there are also families on vacation using even less power than the couple.

But if any of them need more services, the capacity is there and ready to be used. As you mentioned, the wire is so cheap it is almost worthless. That is, until you turn the switch on to see what that strange noise was, and at that time it becomes valuable beyond measure.

Stay safe.

[Southack]

"I wonder why they let it go so cheap and without any apparent bidding. Bill Gates could have bought this with pocket change, and probably didn't even consider it."

Yeah, after all it's only been in the news every week for the past three months... < /SARCASM >

Look, none of the smart money wanted to buy last years technology - for a bet on bandwidth demand that's at least five years in the future.

It goes against Moore's Law.

Technology drops in price and doubles in speed every 18 months, so why pay money today for technology that will be 6 years old before it has any real potential?

Answer that question and then you'll understand why Gates and Buffet and Ellison didn't pay $250 Million or more for Global Crossing's fiber.

[hedgetrimmer]

I read the company was worth $50 billion. Hutchison Wampoa got it for nothing.

[Southack]

Then why didn't you buy it, if it was for nothing?

[SamAdams76]

What do you mean when you talk about the worthlessness of Fiber? Thanks for any reply.

Let me step in and take a crack at this. One word: Wireless.

During the 1800s, we saw the same thing happen with railroads. The railroads were overbuilt and the industry collapsed. Within a few decades, everybody was buying automobiles and the nation was covered in highways instead.

Well we are going to see the same thing with these fiber optic cables. Wireless technology is advancing at breakneck speed. Already, we are seeing wireless networks explode both at home and in businesses. True, these wireless networks still connect to the fiber optic Internet backbone, but it is only a matter of time before even the Internet backbone goes wireless. Within a decade or two, maybe even sooner, those millions of miles of fiber optic cables will be as useless as those thousands of miles of abandoned railroad tracks back in the 1800s.

[LarryLied]

Winnick just gave away $40 million to build a "Museum of Tolerance" in Jerusalem. He is going to need it.

[Cindy]

LADIES AND GENTLEMEN: PLEASE PAY ATTENTION TO POST #5: "The Panama Canal, almost every shipping container in the country, the backbone of the world's internet.... Is there some kind of strategy being played out here? With their nuke capabilty extending range within the next decade to cover the entire US, the Chicoms will soon own the whole country. Thanks Bill Clinton- the true Manchurian candidate."

[flamefront]

Unless you think some monumental satellite system will be the wireless competition to those G.C. transoceanic fibers, you could be very wrong in your projection. Wireless is local and not transoceanic.

Remember Iridium?

[flamefront]

Right, thats the whole unspeakable story.