Brave new world for IDT

Perhaps seeking a direct path to customers, IDT last week announced deals with Liberty Media and Hicks, Muse, Tate & Furst to acquire significant interest in Teligent and ICG Communications, two financially distressed competitive carriers.

Buying stakes in two companies near bankruptcy may seem odd, but it fits with the acquisition strategy of IDT, which derives most of its revenue from long-distance and calling-card services. The deals are part of a plan “to acquire financially distressed entities engaged in the telecommunications business for the purpose of revitalizing those entities through the provision of necessary managerial services, relationships and assets,” according to an IDT SEC filing.

Certainly, Teligent and ICG qualify as financially distressed. The fixed-wireless provider reportedly is on the verge of bankruptcy, while ICG is trying to emerge from Chapter 11 (see story on page 30). The transactions bring IDT's voting power in Teligent to 37% and ICG to 42%.

By increasing its holdings in the two companies, IDT can better control the businesses, according to Riyad Said, managing director and senior analyst at Friedman, Billings, Ramsey Group.

“The more stock, the more shares that they can acquire, the better position they are in to steer this in the direction they want,” he said.

Andrew Sidoti, senior analyst and managing director at Wm Smith & Co., believes IDT will use Teligent and ICG to try to access the local loop.

“IDT does not have a local-loop business, and the company has always thought that last-mile access is an item of importance,” Sidoti said. “With Teligent and ICG, this gives them the ability to create a broadband local-loop business.”

IDT can afford to pursue new strategies. In June 2000, Liberty paid $128.6 million for a 9.9% stake in IDT. In March, AT&T purchased 6% of the company for $75 million. And in August 2000, AT&T acquired 14.9 million shares of Net2Phone from IDT for $1.1 billion.

These transactions have combined to help create an extremely strong balance sheet for IDT, which has no outstanding bank debt and more than $1 billion in cash. Combined with the devaluation of many communications companies with solid assets, IDT believes there are “exceptional opportunities” for investment in the telecom market, according to the company's Web site.

“Because of their position with a debt-free balance sheet with lots of cash, I think that what IDT sees is an opportunity to really become a major player in the telecom business,” Sidoti said. “I think this is all part of that move to move into the big leagues.”

Whether the moves will prove to be successful is questionable, but the price is right, Sidoti said.

“What they did [in the Liberty Media deal] is give John Malone shares in whatever subsidiary or entity they create from this,” he said. “For IDT, there really are few dollars at risk.”

The acquisitions also serve to get IDT noticed by a market in which it feels undervalued. In fact, the company is attempting to buy back 12.5 million of its own shares to bolster its stock price. With its stock selling in the high teens and lower twenties per share, IDT is trading at about the value of its cash — a figure that might not fully reflect the fact that IDT had more than $1 billion in revenues in 2000.

It's possible that IDT may provide financing from its own balance sheet and help arrange financing to help Teligent and ICG try to rebound as stand-alone entities. Another option is for IDT to integrate the companies' assets into its own, Sidoti said.

The sale of these interests to IDT caused an immediate shake-up at Teligent, with Alex Mandl resigning from his posts as chairman and CEO. The new interim head of Teligent is Yoav Krill, former managing director of IDT's European division. Krill will be chief operating officer and acting CEO. Howard Jonas, IDT's chairman, CEO and treasurer, is Teligent's new chairman.

For Teligent, which is struggling under heavy debt loads, completing a successful turnaround will be an extremely difficult task. The company received a 15-day waiver that gives it until May 15 to secure at least $250 million in vendor financing and $100 million in convertible notes.

If it can't raise these funds, Teligent will be in default of credit agreements with Chase Manhattan Bank, Goldman Sachs Credit Partners, Toronto Dominion Bank and other lenders. Currently, the company has no vendor financing or convertible notes.

Teligent's financial troubles do not mean that the company is worthless, said Nick Maynard, an analyst with The Yankee Group.

“The fact that you've got access through your own facilities directly to business customers who were paying $500 a month per customer, that's significant,” he said. “Some of those assets there can be utilized to jump over the RBOC's strangle on the local loop.”

At a glance

Headquarters: Newark, N.J.
Founded: 1990
CEO: Howard Jonas
Number of employees: 1280
Fiscal 2000 revenues: $1.069 billion
Primary services: Retail and wholesale long distance; calling card