“The Bear” on Business

This Telephony article from 2001 is a telecom bubble gem.

In it, Greg Jenkins CEO of El Paso Global Networks writes: “One molecule of natural gas versus another isn’t very different. In telecom, you are plugging a little packet into the fiber optic network, and you want that exact packet coming back out. So the logistics are a little bit more cumbersome.”  Oh, just a little.

Yesterday’s blog covered Pontio Communications.  They were bought by El Paso Global Networks for $108M and El Paso sought to co-lead the bandwidth trading revolution.  They didn’t stop there.  In a co-build with Broadwing, El Paso invested in a long-haul route between Houston and Los Angeles.  From there, they hoped purchase, trade and lease their way to a vast network of bandwidth pipelines. 

The meltdown appearantly was good news for El Paso Global.   “We are in a position to get control of those scarce assets at a time when they are not being sold at a premium. In fact, they are going at a discount,” said Jenkins in the article.  “For this reason, El Paso Global will be able to assemble…network at a much lower cost than we originally contemplated.”  Hooray!

Jenkins and his deeply-pocketed El Paso parent weren’t intimidated from being new to the telecom playground: “While this industry has a great deal of technological sophistication and advancement, it has very little commercial sophistication and a great deal of inefficiencies from an operational standpoint.”  I for one appreciate El Paso’s help in improving our industry.  Thank you.

Balu Balagopal, El Paso Global’s chief commercial officer, echo’d Jenkins’ excitement for the innovation their company would bring to telecom: “[Telecom companies] were motivated to provide a leading-edge service for the simple sake that it was leading-edge and not driven by the value considerations underneath that,” Balu appearantly babbled and then vowed that El Paso Global will not mimic these mistakes. 

By February 21st, 2001, El Paso was making good on Balu’s babble.  In their own words in this press release, they touted:  “El Paso Global Networks has been one of the most active market makers in the emerging bandwidth trading market, having completed more than 260 transactions covering approximately two billion DS-0 miles since the beginning of 2000, including the industry’s first bandwidth option.” Now that is bringing commercial sophistication, efficiency, value consideration to the stodgy telecom industry. 

I included the links so that you didn’t think I made these quotes up.  The telecom bubble was a strange yet exciting place to be. 

Anyway, I have no idea what El Paso contributed to the bubble.  Neither do they.  Let’s put them down for $500M.

In 1995, an Austin-based telecom company called Waller Creek Communications was launched. In 1999, they re-organized and control shifted to new investors and management. Under Rick Weidinger (CEO) and Alan Johnson (COO), the company was re-launched as Pontio Communications Company, Inc., in 1999.

Pontio raised a ton of money from Lucent, perhaps $90M and used this funding to expand the network into Austin, Dallas, Fort Worth, San Antonio and Houston. Perhaps 1,500 fiber miles were built. The company had grander aspirations; in a 1999 article, the following quote appeared: “The company expects to be in 29 cities in 16 or 17 states within 24 months. As it expands, Pontio will consider acquiring other companies to build or buy networks in each new city.”

Around the year 2000, Enron decided bandwidth trading was the thing to do. Dynergy agreed and El Paso Gas and Electric didn’t want to be left on the sidelines. So just as the bubble started to show signs of cracking, Pontio accepted an all cash offer from El Paso which (including assumption of debt) totaled (I think) more than $100M–mabye even more than $150M. Why all cash?–the story I heard is that El Paso viewed their stock as too valuable. Though I don’t know exactly what El Paso paid for Pontio, I do know that Rick, Alan, and gang are still smiling.

So how did El Paso do with this ~$150M investment?  We will pick this up tomorrow.

Somewhere between going into chapter 11 and coming out in ~ late 2003, Adelphia Business Solutions name was changed to TelCove.  During the bankruptcy process, it shut down many of its markets, scaling the 200 to perhaps 50.  The private equity firm Bay Harbor led them out of bankruptcy, with Bob Guth eventually taking over as CEO. 

In late 2004, TelCove acquired a number of markets from KMC.   TelCove spent 2005 being courted by Time Warner Telecom.  As they struggled to get the definitive agreement to the finish line, Level 3 parashooted into Coudersport, PA.  In a brisk weekend of discussions, LVLT and Bay Harbor got to a handshake.  A few months later, TelCove became part of Level 3 for a staggering price of $1.24B.   Bob Guth and the Bay Harbor folks did very well.   Perhaps Bob and Bay Harbor bought that Coudersport golf course that the Rigas family built with “co-borrowed” Adelphia money.

Time will tell as to whether or not Level 3 overpayed.  I think most people in and out of Level 3 would cite this as the least-attractive acquisition they did during their 2006 and 2007 buying spree–but it might still be value accretive.

Excluding KMC portion, I’ll guess Hyperion contribution to the Fiber Boom was $3B. 

Nice.

Earlier in the week, I wrote about Hyperion, the highly irregular-shaped 16th entrant to the Telecom fray.  It had relationships with AT&T, MCI, and many CATV companies.  I asked, what could possibly stop them in their tracks? 

Greed.

In 1999, Hyperion’s name was changed to Adelphia Business Solutions.  Although it was a wholly owned subsidiary of Adelphia Cable, it was (I think) publically traded as a tracking stock.  John Rigas, then head of Adelphia Cable and now a resident of Butner Federal Prison in North Carolina , was the chairman of Adelphia Business Solutions.  

During the bubble, Adelphia Business Solutions bought out all or most of the partnerships with their CATV cohorts.  At its peak, it was well on track to offer service in 200 U.S. markets. Then along came the crash. 

Appearantly the Rigas family was having trouble putting food on the table in the early 2000s.  That’s okay, they figured, they’d just borrow some dough from Adelphia.  “It is our company, isn’t it?”, might have been the conversation during a Thanksgiving dinner. 

The following are excepts from an USA Today article written by Leslie Cauley:

On March 27 2002, in accordance with new SEC accounting rules, Adelphia disclosed that the Rigas family had “co-borrowed” $2.3 billion with the company over a period of time. Concerned that highly leveraged Adelphia would have to borrow an additional $1 billion, at least, because of the loans, investors drove shares down 30% that day.

As criticism mounted, Deloitte & Touche, Adelphia’s auditor for 20 years, started reviewing the audit it had completed but hadn’t yet certified. By then, Rigas says, the firm had declared the just-completed review “our best audit ever.” To celebrate, he says, James Brown, Adelphia’s vice president of finance, threw a party for the Deloitte auditors and the accounting staff at a local hunting club. The celebration didn’t last long. Deloitte refused to sign Adelphia’s federal 10-K filing, causing company shares to be delisted. By summer, Adelphia had filed for bankruptcy-court protection.

On July 24, 2002, Rigas and sons Tim and Michael, Adelphia’s head of operations, were handcuffed and arrested in New York City. Brown and Michael Mulcahey, director of internal reporting, were arrested in Coudersport. The charges included securities, bank and wire fraud.

John Rigas was tried and convicted of securities fraud in 2004 and is serving a 15-year sentence.  He is 83 years old.

Just prior to Adelphia Cable going bankrupt in 2001, Adelphia Business Solutions was spun out along with a bunch of debt.  A few months thereafter, ABS followed its former parent into bankruptcy. 

What happened to Adelphia Business Solutions? Those at the Mecca in Broomfield certainly know.  The rest of you will need to check back into bearonbusiness in a day or two.

Hyperion, the sixteenth satellite of Saturn, is the largest highly irregular (non-spherical) body in the solar system.  Penn Access, which later changed its name to Hyperion, was about the sixteenth entrant into the Telecom Boom party.  It too, as it turned out, had a highly irregular shape.

Penn Access was a Pittsburg-based Competitive Access Provider launched by three AT&T veterans in the late 1980s.  In 1991 or thereabouts, the named was changed to Hyperion and (though I am not sure how) it became a subsidiary of Adelphia Cable. 

In the 1990s the RBOCs were the arch enemy of AT&T and MCI.  In the 2000s, the RBOCs bought AT&T and MCI–so they are enemies no more.  But they were 15 years ago.

Apply the adage “the enemy of my enemy is my friend“, AT&T and MCI desired partnerships with cable TV companies.   Cable TV would lay fiber for their residential fiber/coax networks while AT&T and MCI would use these networks to bypass the RBOCs.  Hyperion, with emphasis on the first five letters of their name H-Y-P-E-R, hyped up their role in this to anyone who would listen.  AT&T and MCI bought into it, and named Hyperion a preferred provider for local access.  Adelphia, a major CATV company, evidently bought into the height as well–as they ended up the Hyperion’s owner.  Other CATV companies followed suit and several 50/50 joint ventures were formed to leverage fiber buildouts within CATV serving areas. 

Hyperion was unstoppable.  It had the key customers (AT&T and MCI),  a wealthy owner (Adelphia), and access to unique network (the fiber plant of its CATV partners).  What could possible stop them in their tracks? 

With tremendous promise, Genuity and the Black Rocket were launched in 2000.  Revenue hit $1.2 billion in 2001, up from $183M in 1997.  Along the way, it racked up $3B in debt and a whole bunch of annual losses–$4B a year in 2001 with no end in sight. 

No worries.  Sometime between 2002 and 2005, Verizon would certainly exercise their option to acquire Genuity.  In July of 2000, Genuity’s share price was around $3.50/share. 

On Monday July 23, 2000, Genuity drew $723M from its bank facility.   On Wednesday July 25th, the Dow Jones soared 489 points, its best day in 15 years. Genuity’s shares plunged 26%, to $2.59/share.  After the markets closed on Wednesday, Verizon announced it would not exercise its right to take control of the company, causing Genuity’s stock price to drop 89% the following day, to 29 cents.  Genuity claimed it’s drawing of the debt was purely coincidental with Verizon’s announcement for it had no idea Verizon would take this step.  Hmmmm.

A few months later, Level 3 reached a definitive agreement to acquire Genuity.  They were downright nostalgic about owning AS1.  By the time the acquisition closed on February 14, 2003, Level 3 paid $60 million in cash to Genuity plus $77 million in cash for prepayments to Verizon for network services.  A tag line on Level 3’s press release was “Transaction Accelerates Free Cash Flow Positive Projection to Second Quarter of 2004.” 

I left Level 3 right around the time this transaction closed.  In fact, the last project I did for Level 3 was some work on what to do with Genuity’s enterprise business. 

I don’t know the total investment that went into Genuity.  Hopefully a reader will help.  In the meantime, I will put them down for $6B.

Just as the new century began, GTE decided to sell to Bell Atlantic.  The RBOCs were not allowed to offer long distance services so GTE Internetworking was without a home.  A deal was worked out with the feds and, in April 2000, GTE spun out their Internet backbone division under the name Genuity.  Eventually, the company went public and raised (I think) around $2.5B dollars.  However, it still had ties to Bell Atlantic–both through a big debt facility and a five year option for Bell Atlantic to acquire the company.  By then, it figured, RBOCs would be allowed into the long distance business and Bell Atlantic would sweep AS1 and a brand new fiber nationwide backbone into its empire.

Next, Genuity decided to bring marketing savvy to the stodgy telecom industry.  “Black Rocket is a scalable, secure, modular, and redundant platform on which eBusiness solutions can be deployed in just ten business days.”  Everyone should have one of those. 

Black Rocket was going to propel Genuity to heights otherwise unseen by fiber-rich telecoms.  Then the meltdown began…( to be continued)

Autonomous System #1, more commonly referred to as AS1, belonged to BBN, one of the pioneering Internet backbones.  BBN was actually founded in 1948 by Leo Beranek and Richard Bolth (both professors at MIT) with Bolt’s former student Robert Newman.  Beranek, Bolth, and Newman = BBN. 

Some of BBN’s notable developments were the implementation and operation of the ARPANET; the first person-to-person network email sent and the use of the @ sign in an email address; the first Internet protocol router (then called an Interface Message Processor); the Voice Funnel, an early predecessor of voice over IP; and work on the development of TCP. 

BBN was acquired by GTE in 1998 and BBN’s ISP division BBN Planet became GTE Internetworking.  A year or two prior to this acquisition, GTE struck a deal with classic Qwest (classic = pre-US West) to purchase 24 fibers in Qwest’s nationwide.  The price for these dark fibers was somewhere in the ballpark of $500M.  I believe GTE secured additional dark fiber from Level 3 and perhaps others.  Lot’s more was spent lighting the network.

As they neared the end of the century, the combination of BBN and newly constructed fiber was certain to be a major player in the Internet revolution… (to be continued) 

Recently Fibernet announced its 1Q08 results.  Fibernet’s annualized revenue is approaching $55M; it grew 16.5% from the 1Q07; its EBITDA increased by 41% over the same period.  Fibernet’s EBITDA as a % of revenue for 1Q08 was 18.4%. 

Fibernet also announced a major expansion of its business.  It must be feeling pretty good about the bandwidth market.  Soon thereafter, it announced a buyback of their stock.  Perhaps it is a bit less enthusiasic about investing its excess cash in expansion. 

Fibernet is one of the remaining players in the Fiber Telecom Texas Hold’em tournament.  However, their seat is at table 2.  Their chips, though being eyed by others, leave it with modest manuevering room.  But the great thing about Texas Hold’em is that it only takes a few good hands to move up the chip leader board. 

Fibernet is as much of a colocation company as it is a bandwidth company.  Its facilities are primarily in the metropolitan NY/NJ area.  Its primary carrier hotel facilities are 60 Hudson Street, 111 Eighth Avenue, and 165 Halsey Street–all well recognized carrier hotel addresses to the telecom crowd. They have also established eight or so other secondary carrier hotel facilities in New York City, Long Island and New Jersey and a small presence in Los Angeles. 

Fibernet has leased or IRU’ed fiber to connect up these sites.  From a facility based perspective, that is about all they have.  They do, however, have an offnet business akin to the old Universal Access.  Their revenue is about $55M and they report $10M of EBITDA.

Tomorrow I will post some recent developments at Fibernet.