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 Singapore government.
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 increased.
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 Business.
"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 differentiation."
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 O'Brien.
"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 the company."
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 instrument."
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."
Singapore increases stake
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% stake.
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 parent company.
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".
Sustainable cash flow
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 unlevered."
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 our business."
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 $75 million".
Return of capital
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 previous earnings.
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."
High access cost
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 error
"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 task.
"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." GTB