Global Crossing Completes Network, But Faces a Challenging Environment
By DEBORAH SOLOMON
Staff Reporter of THE WALL STREET JOURNAL
When Global Crossing Ltd. connected Lima, Peru, to its world-wide fiber-optic network Thursday, the company capped a four-year, $20 billion effort to complete construction of its 100,000-mile telecommunications network linking Europe, North America, South America and Asia.
But the Bermuda-based telecom firm couldn't have reached the finish line at a worse time.
A weakening economy in the U.S. -- and signs of trouble overseas -- has scorched the information-technology budgets of many firms. Some of the companies to which Global Crossing planned to sell capacity have gone out of business or filed for bankruptcy protection, while others are conserving cash amid sluggish revenue and heavy debt loads.
The demand for bandwidth -- which industry observers once assumed would grow 40% to 50% per year -- is instead only growing at about 20%. At the same time, prices for that bandwidth are falling fast -- as much as 60% according to some estimates, as hundreds of competitors all nibble at the same piece of overbuilt pie. The amount of underused long-haul fiber capacity in the U.S. is about 97%.
And Global Crossing has been one of the hardest hit. Its shares, despite being up 12%, or 84 cents, at $7.76 in 4 p.m. New York Stock Exchange composite trading Thursday, are near their all-time low, a far cry from the $61 a share they were fetching two years ago.
Global Crossing Chief Executive Tom Casey has acknowledged that a weakening economy has created a more challenging selling environment than he had anticipated. In an interview, Mr. Casey said, "The fact that we're in a troubled environment is causing people to lose sight of the substantial accomplishments that Global Crossing has made over the last four years."
Burdened with about $14.4 billion in debt from financing to help build its network, Global Crossing spends about $390 million annually on interest payments. Most industry observers don't expect the company to record any net income or to pay off its network until at least 2005. Even shedding nonstrategic businesses has been problematic.
In January, Global Crossing sold its GlobalCenter Inc. Web-hosting business to Exodus Communications Inc., which runs Web sites, for about $6 billion. As part of the transaction, Exodus agreed to purchase 50% or more of its future network capacity needs outside Asia from Global Crossing for a 10-year period. Global Crossing also took a 17% stake in Exodus, an investment that was valued at about $5.3 billion the day the deal was announced. Since then, Exodus's stock price has plunged and the stake is now valued at about $160 million.
To survive the telecom tumult, Global Crossing is trying to transform itself from a wholesaler of capacity into a retail business serving corporations around the globe that use a lot of data. The company wants to provide services such as video networks and high-speed Internet links to multinationals.
Global Crossing has said it expects by next year to be free-cash-flow positive, or taking in more money than it is spending, a key measure in the industry. But Wall Street is skeptical. While many industry observers say Global Crossing is smart to focus on services, the transition "may prove difficult," says Dan Fletcher, an analyst with Lehman Bros.
Last month, Global Crossing, along with two other telecom firms, won a contract from Bear Stearns Cos. to run a fiber link into the financial firm's new world-wide headquarters in midtown Manhattan. Last year, the company won a $250 million contract with the United Kingdom government. And in February, Global Crossing won a contract for as much as $500 million with the Society for Worldwide Interbank Financial Telecommunication, or Swift, an industry-owned cooperative that supplies services and software to 7,000 financial institutions.
The direction in which Global Crossing is headed is far different from the vision that its founder, financier Gary Winnick, hatched four years ago. Mr. Winnick sought to make huge profits by leasing big swaths of capacity on a seamless telecommunications link across the Atlantic to communications companies that, in turn, would use that fiber to get their own branded phone and data services to customers.
In 1997, at a meeting in Los Angeles to kick-off Global Crossing's trans-Atlantic route, Mr. Winnick watched people rush to sign up for the cable. He took a piece of yellow legal-pad paper, taped it to the wall and drew a globe and lines connecting various continents to one another. Selling across the Atlantic was not enough. He wanted Global Crossing to offer fiber throughout the world.
What Mr. Winnick didn't count on was about 1,500 other companies having similar ideas. The glut has led to an intense price war among the fiber operators, who are desperate to win business. "When one carrier is negotiating with another carrier for fiber capacity, the price for that capacity can drop 20% to 50%," says Frank Barbetta, senior analyst with Probe Research.
Global Crossing is currently in talks with Globix Corp., a New York-based Web-hosting firm, about providing a fiber route through Atlanta, Dallas and Miami -- a deal that could be worth $100 million over 10 years.
Globix Chief Executive Marc Bell, whose company is cost-conscious, said the winning bidder will be whoever has the right price and can deliver the service. "Price is what made us let Global Crossing in the door," he says.
Write to Deborah Solomon at deborah.solomon@wsj.com |
