Global Crossing is hoping to raise
$350 million by the end of 2004 with a loan on its UK
operations from institutional investors. The money will be used
to pay $75 million owed to main shareholder Singapore
Technologies Telemedia, which invested in Global Crossing in
2003 a year after the company went into Chapter 11 bankruptcy
protection. STT is owned by Temasek, the investment arm of the
The UK business, acquired as Racal
Telecom for $1.65 billion in October 1999, is profitable and
cashflow-generating and it currently has no debt, chief
financial officer Dan O'Brien told Global Telecoms Business in
an interview. When he gave the interview, in early November, he
put $300 million on the loan, but his aspirations have
Global Crossing is also considering
taking "certain actions" over "less strategic" operations
including Frontier Corporation, also acquired in 1999, and
IXNet, bought in 2000 for $3.8 billion — including
offering them for sale, suggested O'Brien. Details will be
disclosed in January, he said, when Global Crossing plans to
present a strategic review to analysts.
They are "aspects of our business
that are not as strategic to us", O'Brien told Global Telecoms
"It's a matter of looking at our
business portfolio, determining where we think strategic value
and economic value will long term be derived, taking actions to
carve back those aspects of the business that we see less
strategic and not providing strong cash flow going forward or
that would free up cash for funding where we see our point of
The company wants to focus on its
main business, global IP enterprise, he said. So does that mean
disposal, sale or closure?
"It may not be immediate closure,
it may not be sale immediately, it may be just that we operate
the business to insure that it is harvested for cash longer
term as opposed to a position where we put a lot of the
company's resources and more of our own marketing efforts, and
technical and IT resources."
It is a process of "defocusing"
from the legacy voice business that Global Crossing acquired
through some of its early acquisitions, including "Frontier
Telecom, IXNet and other businesses", he said. "We are moving
away from those by taking certain actions to improve
profitability. In certain cases we may be looking to sell
aspects of the business, but not in all cases."
Has this process started? "In a
very small circumstance we have done some marketing activities
around that, but at this point it's fairly small." Which
business? "We can give clearer guidance in January."
We turned back to the fund raising
on the UK network. "It's a very important area for us to ensure
we have sufficient funding until we get to the point of driving
our own cash and that is very much in process," said
"We announced on October 8 with
Singapore Technologies Telemedia a recapitalization process
that started with their agreement, connected with our external
financing plans, to effectively recapitalize their holdings in
STT has a debt of about $325
million in Global Crossing. "What they agreed was that they
would effectively recapitalize that $325 million by taking $250
million and moving it into a mandatorily convertible equity
That will provide STT with
interest, though it will be paid in kind. "For all intents and
purposes it should be looked upon as equity until such time as
they are mandatorily required to convert it into equity."
That means STT can convert the $250
million into equity, in four years or before. That will
increase its shareholding from 61.5% that it is today to over
70%. That 8.5% at $250 million means STT values the company at
$2.9 billion. In 2003 the company invested $250 million to take
the company out of Chapter 11 and get the initial 61.5%
The other $75 million will be paid
back to STT, using part of the proceeds of the current UK
fund-raising exercise. Global Crossing UK "is a profitable,
cash-flow generating business", said O'Brien. The debt
financing will add "some leverage to that business which is
currently not levered today".
The rating agency Standard &
Poor's commented on the planned UK deal — still not
completed as this issue went to press — by pointing
out that virtually all of Global Crossing UK's free cash flow
will be "upstreamed" in the form of dividends or loans to its
Standard & Poor's assigned its
"B–" debt rating to the loan and gave a recovery
rating of "5", which indicates "the expectation of negligible
(0%-25%) recovery of principal in the event of a default".
Why use the UK operation for this
exercise? "It is a separate business within Global Crossing,"
said O'Brien. "Over time it has evolved into a strong,
substantial business in its own right. It has strong customer
relationships, longer-term contracts, and what we see as
sustainable cash flow that make it frankly ideal for the type
of offer that we're doing. That is a business that is currently
He emphasized that Global Crossing
is "maintaining 100% ownership of that business" and this is
not the beginning of a sale. How much would Global Crossing UK
be worth? "I would hate to provide a valuation on aspects of
At the same time, "we're also
putting in place a working capital facility of $50-$100 million
of additional capital to us — not on the UK operation,
but principally on North American receivables", he added.
That "we believe will be sufficient
to fund our business to cash flow breakeven, with some cushion,
and provide a return to Singapore Technologies Telemedia of the
O'Brien was keen to acknowledge the
support of STT throughout. "This return of capital is a return
to them of part of the bridge loan they provided to us during
this period of time. Of the $325 million, $125 million was a
bridge loan, and was expected to be returned at the end of this
year and they have chosen very supportively to keep $50 million
of that in the form of this instrument and we will return $75
million to them. It's critical for us to finish all of that
work because with that the concerns and questions about the
company's financial position will hopefully be solved."
It's been a bumpy year, because
until October O'Brien and his team were working through
unexpected issues, which required Global Crossing to restate
It was a problem with accounting
for access charges. "This is a tremendously complex area," said
O'Brien. "We have hundreds of vendors and we have different
mediums of invoicing and payments. What we concluded was that
certain of the ways in which were validating the amount of our
cost of access on a monthly basis were not as strong as they
could have been."
The company was underestimating the
expense, he said. "We have since put in various procedures,
probably the most important is a more thorough cash
reconciliation between invoices paid to these providers and the
expense estimated through our systems."
It is a complex issue for
everybody, he said. "It's more complex for Global Crossing
because we have much more of our business as a long distance
operation that requires either origination or termination of
traffic on customers' networks or customers' premises with
access providers. The level of access cost that we have
relative to revenue is higher."
Now "we have a very strong
validation step of tying in cash paid to the estimate", he
said. "We are on much firmer ground that it turned out we were.
We are not the first company to have this issue. In our case it
was a larger charge."
He reflected on the huge writedowns
of the value of their networks that MCI and AT&T made a few
months ago. "The industry environment remains very
competitive," he said, though he doubted it was getting worse.
"At Global Crossing we've gone through a process of
revalidating our asset values through bankruptcy and relooking
at what our asset values are relative to where we think the
economic value of our business is in providing IP services on a
global basis to enterprise customers."
The cost of access issue was
something of a surprise, he admitted. "That caused us to go
through a number of things with our auditing firms. That was a
long process and one that took a lot of work with our external
professionals. It was as good an outcome as we could have
expected," he said.
Small but material
"We reached resolution of the
issue. In aggregate we ending up finding $79 million in
under-estimation of our cost of access, including an adjustment
related to emergence. Out of an aggregate for the year of $1.9
billion cost of access related to 2003, that sounds like a
relatively small error. But the reality for a company of our
size that's still material."
Global Crossing used accountants
Grant Thornton and Ernst & Young to determine what the
proper accounting process should be, and all worked with the
Securities and Exchange Commission's chief accountant on the
"I would say Grant Thornton handled
itself professionally through that period, as did Ernst &
Young, and we were able to get through was a fairly tricky
accounting issue," said O'Brien. "We came to the conclusion
that we needed to restate our 2003 results and did so, and
finally came back into compliance with SEC requirements on
October 8. Thankfully through that time Nasdaq was patient with
us while we worked through that issue and maintained our
listing, and reaffirmed that after our announcements."
And now? The task is "running the
business and driving the business to a point where it is
successful in the marketplace, driving its own cash flow in a
positive way through the business," said O'Brien. "We feel
pretty good about the direction we're heading."