Global Crossing Ltd(GX)
Rating: 1S
As of 08/18/2001
Last Changed 11/09/2000
~ August 17, 2001
Global Crossing Ltd. (GX)#
GX: Contract Rebid Due to Procurement Technicality 1S (Buy, Speculative)
not Capability Mkt Cap: $4,660.9 mil.
August 17, 2001 SUMMARY
* A trade publication has announced that the Dept. of
TELECOMMUNICATIONS Defense (DOD) is likely to cancel & rebid a contract
SERVICES awarded to GX on 7/9/01. However, in contrast to some
Jack B. Grubman Street reports, we've confirmed that potential rebid
reflects a procedural SNAFU at the DOD itself, & has
nothing to do with GX's ntwk capabilities. It is wrong
Christine R. we believe to suggest GX fell short on technical
Gochuico capability.
* Contract likely cancelled & rebid, but, we believe
that GX will likely win the contract on rebid since
Charles Simonds obviously the capability, pricing & support that GX
showcased in the 1st bidding process will likely win the
day in the rebid. Furthermore we don't think pricing
will be an issue in rebid as typically there is a very
small pricing variance in bidding for gov't contracts.
* GX's DOD contract will likely be cancelled & rebid due
to a DOD problem in the procurement process, not on a
technical failing. We think GX probably rewins bid and
we cont. to view GX as a long term survivor.
FUNDAMENTALS
P/E (12/01E) NA
P/E (12/02E) NA
TEV/EBITDA (12/01E) 7.3x
TEV/EBITDA (12/02E) 5.1x
Book Value/Share (12/01E) $9.95
Price/Book Value 0.5x
Dividend/Yield (12/01E) $0.00/0.0%
Revenue (12/01E) $6,430.1 mil.
Proj. Long-Term EPS Growth 0%
ROE (12/01E) (29.3%)
Long-Term Debt to Capital(a) 51.3%
GX is in the S&P 500(R) Index.
(a) Data as of most recent quarter
SHARE DATA RECOMMENDATION
Price (8/16/01) $5.26 Current Rating 1S
52-Week Range $37.75-$5.00 Prior Rating 1S
Shares Outstanding(a) 886.1 mil. Current Target Price $30.00
Convertible Yes Previous Target Price $30.00
EARNINGS PER SHARE
FY ends 1Q 2Q 3Q 4Q Full Year
12/00A Actual ($0.44)A ($0.61)A ($0.65)A ($0.70)A ($2.11)A
12/01E Current ($0.69)A ($0.69)A ($0.93)E ($1.01)E ($3.32)E
Previous ($0.69)A ($0.69)A ($0.93)E ($1.01)E ($3.32)E
12/02E Current NA NA NA NA ($3.46)E
Previous NA NA NA NA ($3.46)E
12/03E Current NA NA NA NA NA
Previous NA NA NA NA NA
First Call Consensus EPS: 12/01E ($3.14); 12/02E ($3.30); 12/03E NA
OPINION
According to "Communications Daily," a daily trade publication, the
Department of Defense (DOD) is likely to rebid the contract awarded to GX due
to normal challenges to the general accounting office by the losers of that
contract. However, contrary to some Wall Street reports, we believe nothing
about this rebid has anything to do with GX network capabilities, which is
something that we and other Wall Street firms have confirmed with the
company.
The upshot is that, typically, in government procurement contracts, the
consultation with bidders is on a one-by-one basis, where the government
agency lays out its specifications and each bidder can then respond to that.
In this particular procedure, the DOD had one big meeting where all bidders
had questions and all bidders responded at the same time.
From what we have gathered, the DOD lawyers determined that meeting ran afoul
of normal government practices. Thus, the contract is likely to be
terminated and rebid. It is interesting to note that the DOD procurement
officer, who awarded the bid in the first place and who will award the
contract upon the rebid, is actually fighting his own DOD attorneys over this
issue.
The upshot is that the DOD contract with GX is likely to be terminated and
rebid based on a legal view of the technicalities of the procurement process.
We believe it is wrong to suggest that GX somehow fell short in network
capabilities since that was obviously imbedded during the procurement
process. We expect the entire rebid process to take about three months. It
is likely that GX will win the contract on rebid since obviously the
capability, pricing and support that GX showcased in the first bidding
process will likely win the day in the rebid. Furthermore, we believe that
pricing is not likely to be an issue with a rebid for two important reasons:
1) typically, pricing spreads on government contract bids are within a very
narrow range, as there are a limited number of players who can actually
provide these services and the DOD can essentially name its own price; and 2)
often pricing on these bids can not be changed unless new services are
requested by the government.
The bottom line is that in a market that is very shaky, it is not helpful
when reports are put out that are factually incorrect, which we believe this
one is. Obviously, we prefer that GX not to have to go through the rebid
process, but the chances are that this contract will be rebid solely due to a
legal determination that the procurement process was not handled correctly.
This does not have anything to do with the technical capabilities on the part
of GX according to management. We continue to view GX as a clear surviving
entity in this industry whose challenge is to evolve from a wholesale, IRU,
subsea-driven model to become a more complete, commercially driven entity,
but that has the funding and assets in place, we believe, to weather the
current storm and have a stronger relative position given the demise of many
of the players in the industry.
NET/NET
The DOD contract is likely to be rebid due to technicalities in the
procurement process, not technical capabilities. It stands to reason that
the procurement officer who awarded the contract in the first place to GX
(and who, if it was up to him, would not rebid the contract) is likely to
award the contract, in three months' time, again to GX. The point is the
fact that they got this contract in the first place says something about how
much GX has evolved in terms of its capabilities to deliver full service
solutions that works. |
