Is Global Crossing In Less Risky Waters?

Don't look now, but Davy Jones's locker just coughed up Global Crossing (GLBC ). For those who blocked out the horror of it all, Global Crossing is the telecom network operator with peerless political ties (top Democrat Terry McAuliffe, President George H.W. Bush) but bogus revenues. It went under two years ago, wiping out equity once valued by the stock market at some $50 billion. Late last year it exited bankruptcy, and on Jan. 22 began trading on NASDAQ (new symbol: GLBC).

Lately near $30 a share, could the stock represent a fresh start for the fiber-optic pioneer? CEO John Legere, a former AT&T (T ) and Dell hand, is still some time away from a conference call with Wall Street to discuss fourth-quarter results, not to mention the outlook. In the meantime, he and other execs are staying quiet. But after gleaning some choice details from financials that Global Crossing filed when it emerged from bankruptcy, to me this much is unmistakable: Freed of more than $6 billion in debt, not to mention the costs associated with the 5,600 employees it had to let go and 4.1 million square feet of real estate it vacated, Global Crossing is on a far sounder footing. Yet it by no means enjoys a clean slate.

REPLACING ITS OLD shareholders, who saw their entire interest evaporate in bankruptcy, are its former bankers and bondholders. In exchange for their claims, the court awarded them $523 million in cash, plus 38.5% of the new company's stock. The balance, 61.5%, went to a unit of government-controlled Singapore Technologies, which paid $250 million for it. ST also provided a $200 million, three-year loan, with interest accruing at an onerous 11%.

Reorganized this way, Global Crossing sprang from court protection with the security of more cash than debt and a positive net worth. The company also has maintained a notably strong stream of revenue, despite a brutal market for telecom-network services, oceans of bad publicity, and 23 months in Chapter 11. Global Crossing's revenue last year likely approached $3 billion. Not bad, given that in its peak year, 2001, Global Crossing took in less than $3.7 billion. If Internet telephony begins to take off, as many industry forecasters expect, Global Crossing's 200-city network, stretching from Asia through the Americas to Europe, may see much more traffic, propelling revenues higher.

All that is to the good. Prospective investors, however, shouldn't blink at Global Crossing's continuing challenges. At the top of the list, the business is still losing money and burning more cash than it creates. In 2003's first nine months, operations lost $105 million and ate $88 million in cash. The company figures it will need an additional $100 million in fresh cash to get through 2004. If it can't get a bank line or other loan, new parent Singapore Technologies has offered to put up the dough. Yet the terms are unknown, and in that event minority investors would hold no leverage. As it is, public investors are ST's very junior partners.

Given that considerable risk, how is the market pricing the reincarnation of Global Crossing? Including its convertible preferred shares, all of them held by ST and which come with a 2% annual dividend, Global Crossing now has a stock market value of $1.2 billion. That's 0.4 times its sales, a steep discount to Broomfield (Colo.)-based rival Level 3 Communications (LVLT ). Together with Level 3's $4.8 billion in net debt, investors are valuing it at 2.4 times its revenues, estimated to have hit $4 billion last year. A spread that wide makes Global Crossing an intriguing speculation, even if one that's too daring for me.

By Robert Barker

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