|Press from "not your usual telecom source"|
It's Open Season For CLEC Consolidators
By Brian Ploskina, Inter@ctive Week
October 9, 2000
Competitive local exchange carriers are facing hard times, and the consolidators are moving in. The latest to sell is CapRock Communications, which felt the pressure of competing in the tightly contested BellSouth region and finally agreed to be acquired by McLeodUSA, a similar but larger competitor in the space, for $532 million in assumed debt and equity. So who's next?
GST Telecommunications (www.gstcorp.com) is the most obvious of the bunch, already filing for Chapter 11 bankruptcy and selling off most of its assets to Time Warner Telecom (www.timewarner.com) for $690 million, with the rest most likely to be sold to MBN Communications.
Next in line could be ICG Communications. Its stock has plummeted to a dismal 37 cents, and the company is now being slapped with class action lawsuits from investors. The suits allege that ICG made "false and misleading" statements about the its potential profitability that inflated the price of its stock. ICG could be a steal for any capital firm looking for a leveraged buyout (LBO), since ICG also owns Netcom.
Another candidate for LBO funds may be RSL Communications, whose stock was bumping its head at the $11 mark just three months ago and is now gurgling to stay above $1 per share. Mpower Communications was flying high at $40 per share in July, and now is clinging to $7.
None of the companies wished to comment on the possibility of being acquired.
Adam Guglielmo, an analyst at TeleChoice, said many of these competitive carriers benefited early on from two major market conditions. First, incumbents were slow in deploying Digital Subscriber Lines, and weren't going near business accounts, and second, many investors a year ago were looking for any telecom company with a plan, even if it was a long-term one.
The common excuse for the poor performances among competitive local exchange carriers ap pears to be their continued reliance on the incumbent carriers, such as SBC Communications, Qwest Communications International and Verizon Communications. For the competitors to connect a customer, they must rely on one of these big three, which have their own data and voice initiatives, to connect the local loop to the customer's premises. The recipe hasn't worked well, as the former Bell companies have dragged their feet and left orders unfilled.
Investors now understand the problem, and that's why the money flow stopped, industry insiders said. Instead, the only cash coming in is from LBO funds, said David Silver, a mergers and acquisitions specialist at Santa Fe Capital Group who has been closely scrutinizing the GST purchase. "The LBO funds are finding the [competitive carriers] interesting places to invest, and this means buckets of fresh capital for the industry."
Competitive carriers, such as Birch Telecom, McLeodUSA (www.mcleod.com), Metro media Fiber Networks, Time Warner Telecom and Winstar Communications have stayed above the fray: They don't rely on the incumbents. They build out their own networks, primarily fiber or wireless, that connect to the customer premises, completely bypassing the local copper loop.