Global Crossing's Jan. 28 announcement that it would seek Chapter 11 bankruptcy protection was a move Wall Street has long expected. The company, which operates the largest optical communications network on the planet and holds 20% of the underseas fiber-optic cables connecting the U.S. to the rest of the world, is burdened by $14.6 billion in liabilities as of Sept. 30, 2001.
The surprise in the news was that Global Crossing (GX) had secured a letter of intent on a $750 million cash investment from Hong Kong conglomerate Hutchison Whampoa and from Singapore Technologies Telemedia. In return for that infusion, Hutchison Whampoa Managing Director Canning Fok said on Jan. 28 in Hong Kong that the partners would hold between 70% and 80% of Global Crossing, Reuters reported.
It's a move Global Crossing CEO John Legere hopes will tide over his outfit until it can turn a profit. In announcing the moves, Global Crossing said it sees no problems continuing operations or paying employees.
LONG WAY DOWN. So, white knights ride to the rescue? Not so fast. Most analysts continue to believe that Global Crossing still faces daunting challenges. After all, it generated just $2.4 billion in revenues in the first three quarters of 2001, vs. $3.8 billion for the same period of 2000, according to First Call. Despite $1 billion of cash still on its books, Global Crossing could have been expected to run out of money sometime in the coming year if it hadn't decided to seek bankruptcy protection.
Its shares have slid to just 30 cents -- a tiny fraction of its high in the months before the tech sector began its fall from grace in March, 2000, when Global Crossing's stock was nudging $60.
The biggest problem may be its customers, most of which are other telecommunications carriers. They have been loyal clients but negotiate ruthlessly for low prices. What Global Crossing lacks are lucrative corporate clients prepared to pay top dollar for dedicated bandwidth and exotic services. That market also happens to be growing fastest and is generally seen as having the brightest prospects. Says S&P analyst Craig Shere of Global Crossing: "It's going to require a different marketing approach, maybe even different customers."
SLIDING PRICES. Clouds are also hanging over Global Crossing's place in the broader telecom market. As the economic downturn continues, prices for telecom services provided over long-distance networks will continue to drop, according to optical consultancy RHK. Those rates have already fallen at a double-digit pace over the past five years. Even if the Asian saviors' plan succeeds, those downward trends may put a serious crimp on Global Crossing's prospects of future revenues.
Global Crossing rejects this bleak prognosis. According to CEO Legere, the bankruptcy is a "..balance-sheet, not an operations, issue." The company put its British-based assets up for sale in December, hoping to collect about $750 million. Earlier, it announced an agreement to sell its IPC Trading System for $360 million to an investment group lead by an affiliate of Goldman Sachs. But according to Anthony Christie, Global Crossing's vice-president for global strategy, the company has no additional restructuring plans.
That might reflect Global Crossing's lack of options. Few analysts think other telecoms would be interested in acquiring it. Many of the company's assets have low value, and its North American network is aging, says RHK analyst Brian Van Steen. In a market where outfits gobble each other up to acquire competitors' customer lists, Global Crossings' are well-known -- and not regarded as all that compelling. Says Paul Sagawa, an analyst with investment Sanford Bernstein: "I think it will be difficult for them to survive as an independent company."
COMFORT AND JOY? Bankruptcy proceedings will likely add a further layer of complications to any future turnaround plan: Rather than risk awarding big contracts to a company with an uncertain future, some customers might decide to take their business elsewhere.
Global Crossing does have some strengths, starting with loyal customers that have known about the company's financial troubles for quite some time. Says Christie: "The announcements we made today will comfort them."
That comfort, however, will depend on whether or not the two suitors go through with their investment. "I wouldn't give it to them," Sagawa says of the $750 million infusion Global Crossing is expecting. Add it all up, and Legere may find he still faces a rough crossing -- despite the hopeful news. By Olga Kharif in Portland, Ore.