Reaching profitability could be the only hope for CLECs.
Baby Bells May Be NorthPoint Scavengers For A Pittance
By Christine Nuzum Of DOW JONES NEWSWIRES
NEW YORK -(Dow Jones)- One or more of the regional bells might pick up the assets of NorthPoint Communications Group Inc. (NPNT) for a pittance following the company's filing for Chapter 11 bankruptcy, but bondholders probably won't be saved by any bidding war, analysts say.
"We think that this bankruptcy sale could set a new low for CLEC (competitive local exchange carrier) asset valuations," said Morgan Stanley Dean Witter & Co. analyst Todd Scott.
The company's bond price - recently quoted at 16 cents on the dollar - indicates the market appraises NorthPoint's assets at less than half of net property, plant and equipment, Scott said.
After GST Telecommunications Inc. (GSTXQ) filed for bankruptcy in June, the $ 690 million sale of its assets to Time Warner Telecom Inc. (TWTC) was seen as a steal at what Scott estimates was 80% of net property, plant and equipment.
When NorthPoint filed for Chapter 11 Tuesday, Chief Executive Elizabeth Fetter said the company planned to use the "breathing room" of protection from creditors to look for a "financially sound strategic partner who is interested in our network, our skilled and dedicated employees and our attractive customer base."
Verizon Communications (VZ) fit that bill until December, when it annulled its August pact to acquire NorthPoint, saying that the start-up company's November restatement of third-quarter earnings amounted to a "material adverse change" in the company's business.
Tuesday, Fetter said it was Verizon's exit from the merger pact that led NorthPoint down the path to bankruptcy.
After scrapping the acquisition of NorthPoint, Verizon executives reiterated their commitment to expanding the company's business in digital subscriber line, or DSL, service, which provides high-speed Internet access over copper telephone lines. They described a "facilities-based approach" involving extending infrastructure outside Verizon's coverage when necessary to serve existing customers.
Verizon has been aggressively adding DSL subscribers since. Analysts and fund managers point to Verizon as a potential buyer for NorthPoint's assets, which consist mainly of DSL equipment set up in about 1,800 central offices owned by local carriers in cities across the country.
Verizon declined to comment, citing the ongoing $1 billion lawsuit filed against it by NorthPoint after the merger fell through. The company maintains it was within its rights to end the merger pact.
A NorthPoint spokesman said the company has seen "a variety of interest" for its assets, including interest in acquiring them as a whole. He said NorthPoint intends to sell its assets to a single buyer, but some investors say a piecemeal sale is more likely.
RBC Dominion analyst David Bank said all the Baby Bells want to offer DSL service nationwide and that NorthPoint's DSL equipment that is "collocated," or set up in the central offices of local carriers.
Also, the regional Bells have a regulatory incentive to acquire equipment collocated in the central offices of competitors, he added. The Federal Communications Commission is more likely to look favorably on the competitive efforts of a company that has equipment collocated with a competitor, Bank said.
All three other regional Bells also declined comment on the possibility of buying up NorthPoint's assets, but Augie Cruciotti, senior vice president of local broadband services at Qwest Communications International Inc. (Q), elaborated on its strategy to expand its DSL coverage.
Cruciotti said the company is targeting small businesses in 25 cities. He estimates that Qwest will have DSL equipment in about 400 central offices by the middle of this year, and plans to add no more than 100 central offices afterward.
"With a footprint of 400 to 500 (central offices), we can get 70% coverage," he said.
Merrill Lynch analyst Kenneth Hoexter estimates that NorthPoint's 1,800 central offices service an average of 48 lines apiece. It takes 60 to 65 lines per central office for a colocation to reach the cash-flow break-even point, he said, and double that number to break even in earnings before interest, taxes, depreciation and amortization.
Given that data, Qwest seems an unlikely candidate for the single bidder that NorthPoint is seeking.
-Christine Nuzum; Dow Jones Newswires; 201-938-5172 (This story was originally published by Dow Jones Newswires)
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