April 9, 2001
Market Place: How to Salvage Two Companies Buried in Debt
By BARNABY FEDER and GERALDINE FABRIKANT
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ost of the headlines concerning the business ventures of the billionaire Craig O. McCaw in the last year have focused on his high-stakes maneuvering to pursue his dream of creating a satellite communications empire.
But right now, Mr. McCaw also has pressing problems with his two major land-based telecommunications investments: Nextel Communications and Xo Communications.
Both are deeply indebted, rapidly expanding money-losing voice and data communications companies that, unlike the satellite ventures, are accountable to public shareholders, as well as bond and note holders. Before either Nextel or Xo have a chance of breaking even, they need to raise billions of dollars in new loans or equity to complete their ambitious development plans.
A year ago, doubts about their ability to raise the money were offset by the McCaw mystique. After all, the visionary Seattle entrepreneur had become a legend for his ability to use borrowed money to expand his family's cable television business and then McCaw Cellular. In both cases, financing pressures eventually rose to the point the Mr. McCaw decided to sell, but investors who had hitched their fortunes to Mr. McCaw's vision profited handsomely.
The sale of McCaw Cellular to AT&T for $11.5 billion in 1994 was particularly stunning. Some of Mr. McCaw's resulting fortune was plowed into rescuing Nextel, a nearly bankrupt wireless carrier that was attempting to break into the crowded cellular market using digital radio communications technology developed by Motorola. The successful revival of the company by managers Mr. McCaw installed after he gained control in 1995 added billions of dollars to the parterships and trusts he controls.
In 1998, Mr. McCaw rounded up former McCaw Cellular executives to create Nextel Partners, an affiliate of Nextel Communications that extends its wireless technology to small and midsize cities. Nextel Partners raised more than $470 million in its own initial public offering last year.
Meanwhile, Mr. McCaw had also founded and taken public NextLink Communications, a company based in Reston, Va., that started out as developer of fiber optic networks to provide phone and data services to business customers. After acquiring radio spectrum the government auctioned off for new wireless services and buying an Internet networking company, NextLink changed its name last fall to Xo Communications.
Both Nextel and Xo were organized with special classes of stock and management agreements that gave Mr. McCaw ultimate control. The reputations of Mr. McCaw and the executives he has recruited to work with him helped generate billions of dollars of investment from banks, fund managers and venture capitalists. Forstmann-Little alone put more than $1.2 billion into Xo and its affiliates.
In the last year though, investors have become increasingly cautious about the aggressive growth tactics of the McCaw-controlled companies. And in recent months, as the economy has slowed and numerous telecommunications companies have stumbled, the shares of the McCaw ventures have fallen to the point that institutional investors have begun to think the unthinkable. Could these companies eventually be forced into bankruptcy reorganization?
Nextel, which had $5.7 billion in revenues last year and more than 6.7 million domestic subscribers, says it has roughly $7 billion in available financing and $14 billion in long-term debt. Although revenues are growing rapidly, analysts figure the company spent nearly $3 billion more than it brought in last year and may run up a similar cash shortfall this year. Last month, the company trimmed projections for subscriber growth in the current quarter to 500,000 from the previous forecast of 530,000 and said that cash from operations might be 15 percent lower than in the previous quarter.
The company also had to drop plans for a public offering to raise money for Nextel International, the wholly owned subsidiary for Nextel's overseas holdings, as investors fled the telecommunications sector. Many analysts figure Nextel could go well into 2003 without having to raise cash. But that assumes a round of cuts in the company's planned expansion and other belt-tightening. — Such moves would save cash but could leave the company less competitive in the long run.
"Its prospects don't look as good as they did," said Frederick Moran, an analyst who follows Nextel for Jefferies & Company. "The stock got ahead of itself due to its seemingly endless growth prospects. But with the onslaught of competition, tight capital markets, and a possible recession, the company has lost some of its subscriber growth momentum."
With Nextel's shares down from $79.81 just over a year ago to $12.31 last Friday, The 11 percent stake in Nextel owned by Mr. McCaw's investment group is worth some $5 billion less. But his more immediate concern must be Xo, in which he and his partners have a 22 percent stake. Xo shares ended trading Friday at $3.31, down from their peak of $66.25 13 months ago.
Xo is on course to run out of cash within a year, and investors are nervously wondering what steps, if any, Mr. McCaw plans to support it. Mr. McCaw bought 29,500 shares at $17.48 a share early this year, according to a recent filing with the Securities and Exchange Commission, but a purchase of outstanding shares is not the kind of endorsement the investors have in mind. Xo's own projections, which may now be too optimistic, suggest a need for roughly $2.5 billion in new loans or equity to carry into 2005, the year it expects to start breaking even.
"I must have gotten over 100 calls from institutional investors wanting to know if he'll step up," Aryeh Bourkoff, a UBS Warburg debt analyst, said last Wednesday. That was the day after Xo's shares dipped below $3 and bad news was swirling about the financial woes of similarly debt- laden rivals like Teligent and Winstar. `A funding gap is death in this market, " Mr. Bourkoff said.
Responding to the anxiety, Xo issued a statement late Wednesday attempting to reassure investors. Daniel Akerson, the company's chairman and chief executive, said that the company had $3 billion in cash available. That was enough, he said, to allow Xo to "weather the carnage that the telecommunications industry is now experiencing." Xo said it expected to be able to raise money in the future and to take advantage of the opportunities created by the current industry shakeout.
It seems unlikely, though that there will be a major infusion of cash from Mr. McCaw and his partners anytime soon. "It's not Craig's approach to just throw money at things," said Dennis Weibling, president of Eagle River, Mr. McCaw's investment holding company. "There is a lot you can do to adjust the burn rate." Mr. McCaw is actively involved in Mr. Akerson's effort to revise Xo's business plans to reduce the financing gap and delay the day it needs more cash, according to Robert Ratliffe, Mr. McCaw's spokesman.
Mr. McCaw has plenty of incentive to keep his companies afloat. As things stand now, Nextel and Xo have so much long-term and secured debt compared with the market value of their assets that his own equity interests might well become worthless in a bankruptcy reorganization. A lot of investors are hoping he has not lost his touch for engineering profitable escapes from tight financial corners. |
