May 11, 2001
Tech Center
IDT Scavenges for Bargains
In Phone-Upstart Wreckage
By SHAWN YOUNG
Staff Reporter of THE WALL STREET JOURNAL
The chairs behind the utilitarian desks in the Newark, N.J., offices of IDT Corp. don't match. They are a patchwork of bargains picked up as they came along -- just as IDT's chairman, Howard Jonas, is now sifting through the wreckage of faltering telecommunications upstarts for deals.
IDT specializes in two of the least-glamorous niches in the telecommunications industry, wholesale long distance and prepaid calling cards targeted at immigrants. Mr. Jonas started the company after developing sticker-shock over his phone bills from Israel, where an employee of his other businesses had relocated. IDT was launched in earnest in 1991 using equipment crammed into the men's room of a converted funeral parlor that Mr. Jonas shared with his father's insurance business in the Bronx. "While the other guys were at Goldman Sachs, we were driving vans," Mr. Jonas says.
Now, Mr. Jonas's downscale company is moving into territory that the white-shoe set has fled, snapping up everything from network gear to major equity stakes at bargain prices. In the process, it's cementing relationships with such master deal makers as the Dallas buyout firm Hicks, Muse, Tate & Furst Inc. and entrepreneur John Malone, whose Liberty Media Group owns 9.9% of IDT. IDT has agreed to buy from Liberty and Hicks Muse major stakes in Teligent Inc. and ICG Communications Inc., two distressed local phone upstarts whose assets would allow it to add high-capacity local phone and data connections to its menu of services. Mr. Jonas declines to discuss those deals but says he remains on the prowl for other cheap assets.
IDT's business plan: operate the same telephone and Internet networks others are abandoning at a fraction of the cost. "As soon as we see that another company has gone out of business, we run to the phones" to see what they are selling off, says Mr. Jonas, a 45-year-old father of eight. "Right now you could practically build a network for free." Recently, he says, he bought about $18 million of miscellaneous equipment from a failed company for $1 million. "It was like a tag sale," Mr. Jonas says. "We sent out trucks."
1Telecom Industry Faces a Costly Reckoning on its Debt
This could be a great year for scavengers, industry experts say. As a bumper crop of telecommunications upstarts withers, companies in a strategic and financial position to scrounge may find great opportunities. They can salvage assets and perhaps whole companies that are either too small or too distressed to interest the big players, the experts say. Uncoupled by bankruptcy or near-bankruptcy from the high costs, heavy debts or strategic blunders that accompanied their creation, some of the failures could be revived.
IDT's core long-distance business is feeling the same squeeze from price wars and the costs of investing in new ventures as the rest of the industry. The company says it expects the business to return to profitability this summer as competitors that were forcing down margins go out of business. IDT had an operating loss of $88.4 million in the fiscal year ended July 31, 2000, excluding interest, taxes and results from the Net2Phone Inc. unit in which it no longer has a majority stake. In fiscal 2000, IDT reported revenue of $1.1 billion and net income of $231.9 million, or $6.14 a share, including a one-time gain of $373.8 million.
Getting its assets cheap or for free doesn't mean IDT will succeed where others have failed. The company acknowledges that it lacks important organizational and administrative skills, though it says it's working on the problem and is close to completing a restructuring. Buying equity stakes also doesn't guarantee the company a say in how bondholders and bankruptcy court judges will determine the fates of companies that have sought bankruptcy protection. It isn't clear, for instance, that IDT will be able to merge with ICG, which has sought bankruptcy protection, because such decisions are up to the bondholders and the court.
But so far Mr. Jonas has shown good timing and a knack for deal-making. He pioneered Net2Phone as a way to make cheap phone calls over the Internet and nurtured the business even as critics denigrated it as a poor-quality niche operation. Net2Phone had its initial public offering in 1999, and last year, before the market for all things Internet cratered, IDT sold part of its Net2Phone stake to AT&T Corp. for $75 a share, or $1.1 billion. Net2Phone now trades for about $8 a share. In the bargain, the carriers agreed to offer each other favorable rates. In keeping with another part of the same agreement, AT&T took a 6% stake in IDT in March at $36.75 a share, when IDT was trading at about $20. As of 4 p.m. Thursday on the New York Stock Exchange, IDT was trading at $23.40.
Mr. Jonas says he didn't realize last year that he was cutting his deal with AT&T at the peak of the market. "In retrospect, it was a great deal, but the truth is, we didn't really expect that the great part was going to be the $1 billion we put in the bank," Mr. Jonas says. "We thought it was the 10 million shares of Net2Phone we still owned because they were going to go through the roof."
In another recent example of Mr. Jonas's gift for timing, IDT in February bought part of its chief rival in the calling-card business, PT-1, from Star Telecommunications Inc., for $1 and the assumption of less than $20 million in liabilities. Mr. Jonas says he had been urged to buy PT-1's calling-card business two years earlier for more than $400 million. Bankers pushed the deal, but he decided to wait. "I just thought it was insane. We're frugal," says Mr. Jonas, who has a 30% equity stake and a 60% voting stake in IDT.
The company picked up another bargain from a settlement last year of a lawsuit against a Tyco International Ltd. unit, Tycom Ltd., a fiber-optic network builder. The settlement gives IDT free transmission rights on undersea telecommunications cables for 15 years and allows it to lease this free asset to other carriers.
"The management team sold assets at top dollar and is now in a position to pick up assets at pennies on the dollar," says Andrew Sidoti, an analyst with W.M. Smith & Co., a Denver investment firm. "IDT is making the push into the big leagues. It's positioned to take advantage of the turmoil."
Even if the ICG and Teligent ventures flop, they could provide a useful tax shelter for IDT, analysts say. It isn't clear exactly how the write-offs might work, but people who have done business with Mr. Jonas say he energetically pursues every legal tax break. The company says taxes don't dictate its dealmaking.
Over the long haul, Mr. Jonas is a believer in convergence, or the point where entertainment, computers and telecommunications all come together. Internally, the company is focused on developing its TV.TV venture, an entertainment network that will operate over the Internet. IDT plans to use the service to offer movies, shows and events to consumers and businesses. To use the service, viewers will need the kind of high-speed Internet connections that can deliver good quality pictures. That means cable modems, DSL or the kind of high-speed hookups available on the networks of Teligent and ICG.
That's where IDT and Mr. Malone may be able to do more business together. Mr. Jonas has been courting Mr. Malone since 1997, when he wrote the legendary financier a long fan letter and merger proposal, a handwritten draft of which hangs framed on a wall in IDT's headquarters.
"There's nobody I would rather work with than John Malone," Mr. Jonas says. "But we have to wait and see if the glass slipper fits. And we have to hope he brings the glass slipper."
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