Genuity agrees to be sold to Level 3
Deal planned after firm rises from Chap. 11
By Peter J. Howe, Globe Staff, 11/28/2002
boston.com
Genuity Inc., the Woburn telecommunications services company whose corporate roots date to the earliest days of the Internet three decades ago, filed for bankruptcy protection yesterday as part of a planned $242 million sale to Level 3 Communications.
In what Genuity chief executive Paul R. Gudonis called ''the best possible outcome for our creditors, our customers, and our employees,'' Level 3 would buy ''substantially all'' of Genuity after its expected emergence from Chapter 11 this winter. Genuity would operate as a Woburn-based Level 3 subsidiary focused on data services for businesses.
Gudonis said it is not clear how many of Genuity's current 2,500 employees, about 1,400 of them based in Woburn, will remain after the merger into Level 3. Genuity has slashed 2,800 jobs in the last two years as its revenue has slipped amid a raging price war for Internet services.
''It's likely when you have this type of merger that overlapping positions are eliminated,'' Gudonis said. ''We can expect that there will be some elimination of positions, but there are no numbers at this point and no time frame.''
The Level 3 deal has support from all but one of the banks that have a $2 billion credit line with Genuity and from former owner Verizon Communications, which has a $1 billion line of credit with Genuity.
Genuity shares, which once traded as high as $220 adjusted for a 1-for-20 reverse stock split earlier this year, plunged 20 cents to 26 cents yesterday. Shareholders are likely to recoup little or nothing after the bankruptcy.
Level 3 shares gained 41 cents, or 7.9 percent, to close at $5.60. The Broomfield, Colo., company received a $500 million infusion from Nebraska billionaire Warren Buffett and other investors this summer to help it pursue a strategy of consolidating distressed telecom properties like Genuity.
Verizon divested Genuity two years ago as a condition of the Bell Atlantic-GTE merger that formed Verizon. Genuity's corporate lineage dates to Cambridge Internet pioneers Bolt, Beranek&Newman, which got a Pentagon contract to build a forerunner of today's Net in the late 1960s, went public in a $1.9 billion initial stock offering the largest Internet IPO.
But Verizon sent Genuity into a financial free fall in July when it abandoned a right to regain control of Genuity, which operates a 17,500-mile global fiber-optic network, Web-hosting and data centers, and Black Rocket-brand data services for 3,000 customers. Genuity provides wholesale Internet services for America Online, Verizon, EarthLink, and other Internet providers.
The $242 million purchase price could be reduced if Level 3 opts not to buy certain Genuity assets, which could include certain fiber-optic routes or data centers that are redundant to existing Level 3 facilities.
Other bidders could emerge for Genuity during the bankruptcy proceedings, but analysts said they consider it unlikely.
''I think that's an incredibly unlikely scenario,'' said Maribel L. Dolinov, a senior analyst with Forrester Research in Cambridge. With WorldCom and Global Crossing bankrupt, Qwest Communications in dire financial straits, most big foreign carriers saddled with huge debt, and Verizon unlikely to approve a Genuity sale to archrival AT&T, Dolinov said she sees no likely rival for Level 3.
''I was actually surprised that Level 3 stepped up,'' Dolinov said. ''It seemed that you would let this company go out of business and take their customers'' rather than buy it, but she noted, ''Where else could you buy $1 billion in revenue for $242 million?'' Dolinov said Genuity will enable Level 3 to sell more retail services to big firms and gain ''a highly credible engineering team'' from Genuity.
Gudonis said ''there's overcapacity in the backbone [Internet] industry. That's why it's ripe for consolidation. [But] I believe that Level 3 is going to be the winner in this consolidation.''
Gudonis said despite its financial travails, Genuity continues to enjoy a 100 percent annual increase in telecom traffic moving over its networks and is gaining 1,000 new broadband Internet subscribers every day through partnerships with AOL, Verizon, and EarthLink.
Creditors who are collectively owed over $3 billion appear likely to get only a fraction of that from Genuity. When the deal closes, the $242 million being paid by Level 3, and what is left of the current $800 million in cash on Genuity's balance sheet, would be distributed to creditors. Level 3 also will assume an undisclosed amount of Genuity debt.
In an interview, Level 3 chief executive James Q. Crowe said the two companies ''really are compatible. We have a common view of the industry. We just think we see the world in the same way.
''We plan to keep the Genuity brand and name alive,'' Crowe said. ''It has a lot of value. It's one of the most respected names in the industry.'' Crowe said that ''it is for time to tell'' whether other bidders emerge, but said Genuity's future is ''greater with the Level 3 combination than any other combination.''
Crowe noted that ''as with any acquisition, there is a risk that the Genuity transaction may not be completed, and we continue to analyze and consider other opportunities.''
Crowe and Gudonis said it is likely the two firms will be able to substantially consolidate their networks, which both have excess capacity for Net traffic. Level 3 operates a 16,000-mile network covering 57 markets in North America and a 3,600-mile network serving 16 European markets. Level 3 also has 946,000 fiber-miles of local optical telecom lines in 36 markets, including Greater Boston, where it operates data centers in Cambridge and Needham.
Besides telecom, Level 3 also generates much of its cash flow from far-flung operations including software distribution, coal mines, and a toll road in California in which it holds a 65 percent stake that it is working on selling.
Genuity's bankruptcy filing, made in the New York Bankruptcy Court, includes US-based Genuity International Inc. but does not include local subsidiaries outside the United States such as a European operation.
Verizon, which is about halfway through a five-year, $500 million contract to buy services from Genuity, said it signed a new multiyear deal effective with the Level 3-Genuity merger to buy wholesale services for dial-up Internet subscribers and other long-haul data services.
Lawrence T. Babbio, Verizon's president and vice chairman, said the New York phone giant ''is very pleased to be entering into this partnership, under which Level 3 will become Verizon's primary supplier of backbone services.''
America Online, which pays Genuity an estimated $300 million a year to provide Net access for millions of its subscribers, said it signed an agreement approving Level 3 taking over network services now provided by Genuity.
Geraldine MacDonald, AOL's senior vice president for global access networks, said: ''We are in support of this transaction, which provides us with the assurance of stability and a seamless continuation of service. We've been very pleased with the service Level 3 has provided in the past, and we look forward to a continuing positive relationship.''
Also backing the deal is Dallas-based Allegiance Telecom Inc., which is Genuity's largest provider of network access services.
In terms of future management at Genuity, Gudonis said: ''It's really inappropriate for me to discuss what transpires'' after the deal is completed. ''I have no firm plans around that at this time. I have no agreements other than to lead this company through this transition.''
Peter J. Howe can be reached at howe@globe.com.
This story ran on page D1 of the Boston Globe on 11/28/2002.
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