May 23, 2000
Dow Jones Newswires
GST Telecom May Be Only First Upstart Phone Co To Fold
By JANET WHITMAN
NEW YORK -- GST Telecommunications Inc. (GSTXQ), which filed for bankruptcy last week, may be only the first upstart telephone company to fold.
The woes that plagued the Vancouver, Wash.-based company - escalating cash flow problems, a substantial debt load, and an inability to secure additional financing - could confront several of the hundreds of publicly traded competitive local-exchange carriers, also known as CLECs, especially if the Fed continues to wage its war against inflation with higher interest rates. The sell-off in technology stocks hasn't helped.
"It could get kind of ugly," said Michael Gallipo, manager of the Monument Telecommunications Fund. "Anybody that didn't get their financing in order could have trouble going forward. They're probably not going to get it today."
Telecom newcomers, which are vying for a share of the $100 billion local-phone market dominated by the Baby Bells and GTE Corp. (GTE), have to invest big bucks to build their telecommunications networks and, in most cases, are a long way from profitability.
A handful of CLECs have secured financing through next year and beyond. For the ones that haven't, particularly smaller, less-established companies, it could be tough going. The climate for raising money is growing increasingly inhospitable and start-ups looking for further financing in the junk-bond market aren't likely to have much luck.
"It's going to be especially difficult for any company that needs money in the next six months." said John Hodulik, telecommunications analyst with PaineWebber Inc. "It (further bankruptcies are) always possible."
Major CLECs Well Funded
"This is where I get to say we're very happy we raised all of that money this year," William J. Rouhana, Jr., chairman and chief executive of Winstar Communications Inc. (WCII), told Dow Jones Newswires.
Winstar, which has spectrum licenses in the top 60 U.S. markets, refinanced $1.6 billion in debt in March, and also received significant investments from Lucent Technologies Inc. (LU) and Microsoft Corp. (MSFT), providing the company with "more than enough" capital to take it through 2001, said Rouhana.
In addition to vendor financing from equipment manufacturers, a number of the more-established CLECs, including ICG Communications Inc. (ILGX), McLeodUSA Inc. (MCLD), Nextlink Communications Inc. (NXLK), Teligent Inc. (TGNT), and others, have received significant investment from leveraged-buyout firms or other investors.
"Just about every one of the major CLECs out there has signed something in the last six months. GST was a little bit of a special circumstance...with significant fundamental missteps, such that investors were much less comfortable to put money into them," said Alan Harris, co-manager of the Munder Net Net Fund and the Munder Future Technology Fund. "They did not have a vendor agreement or a major strategic buyout investment and that to me was a telling signal."
Still, less-established start-ups without adequate financing could face similar trouble.
Upstart E.spire Communications Inc. (ESPI), which was rumored to be facing bankruptcy earlier this year, says it's not one of them.
The company's shares tumbled 30% March 31 after it announced it wasn't in compliance with certain covenants within its $200 million senior secured credit facility.
An E.spire spokeswoman said its financial trouble was misunderstood. "We were not in compliance and we received a waiver from the bank," she said.
E.spire has been unfairly tarnished by GST's troubles, she added. "We have a similar profile and I feel we've gotten a bit bumped down (as a result)."
The company, which recently named a new senior management team, some of whom have invested in the company, has "enough cash on hand to get us through this year and probably into the beginning of 2001," she said.
Industry Seen Consolidating
Some other CLECs may not be so fortunate.
"The last time I checked, there were about 600 publicly traded (CLECs in the U.S.)," said Monument's Gallipo, who is leery about having too much exposure to CLECs in his portfolio because, generally, he thinks there are too many.
"A lot of them are rinky-dink companies," he said. "With that kind of number, you're bound to have some that don't make it."
The situation makes consolidation a likelihood. Ailing CLECs with strong assets and a decent customer base will likely be takeover targets by well-capitalized CLECS and by international telecommunications companies looking for a presence in the U.S.
Indeed, substantially all of GST's assets were quickly snapped up by Time Warner Telecom Inc. (TWTC) for $450 million, an amount significantly lower than the cost of building the assets. (The sale is subject to a definitive agreement and bankruptcy court and regulatory approval.) Maui-based MBN Communications Inc. also entered a bid to acquire GST's assets in Hawaii for $76 million in cash, equal to the book value of the assets.
"We are watching all of these things with great interest," said Winstar's Rouhana, adding that his company's finances put it in a strong position for possible acquisitions.
"You don't know when there will be a chance to pick up assets, especially in an environment like this," he said. "Companies like Winstar are going to be able to pick and choose."
-By Janet Whitman; Dow Jones Newswires; 201-938-5248;
janet.whitman@dowjones.com
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