CLEC FIRE SALE SIGNALS END OF EXPANSION

Nobody can accuse McLeodUSA's new regime of sitting idly on the throne. After only 60 days in office, Ted Forstmann's revamped board and hand-picked Chief Operating and Financial Officer Chris Davis have squeezed the competitive carrier's old business plan into submission.

McLeodUSA's new plan features wholesale changes, including the elimination of the company's national expansion plan, a 15% work force cut and hundreds of millions of dollars worth of assets. McLeod will eat a $2.9-billion charge in the third quarter as it pursues a strategy focused on its core small-enterprise and residential data and voice business in 25 states.

Many Wall Street analysts were shocked by the scope of the sweeping restructuring program, which was unveiled 30 days ahead of the schedule announced in August, when Forstmann revamped the executive ranks and promised to infuse $100 million into the company. But that investment has been delayed, and the company's stock plummeted to less than $1 per share amid bankruptcy speculation.

McLeodUSA quickly denied bankruptcy rumors, but during an analyst briefing last week, Davis — a veteran of Forstmann success story Gulfstream Aerospace — made it clear the carrier is in financial shambles.

“The size and scope of the business became too big for the financial systems that were in place,” she said.

Calling its once-touted national expansion a “distraction,” the revamped company plans to sell many of the acquisitions it made last year, including most of SplitRock Telecommunications. But the changes won't come cheap, as McLeodUSA will take a $2.5 billion write-down on goodwill and an additional $400 million charge for shedding inventories and 1600 employees from the books.

Most financial analysts welcomed the news, but some questioned whether a pared-down McLeodUSA could generate enough cash flow to meet payments on its $3.8 billion in debt.

“McLeod's making all the right moves,” said Jim Friedland, a Robertson Stephens analyst. “The problems remaining are with their capital structure. Over the long term, is McLeod going to generate enough EBITDA to pay their interest?”

But the moves are not surprising to those familiar with Forstmann and Davis, a Forstmann Little spokesman said last week. Despite his chairmanship of the executive committee, Forstmann is taking a hands-off approach to leaving the financial management of the company to Davis and other officers.

“Teddy Forstmann is clearly an adviser to the company, but this is the company making these decisions now,” the spokesman said. “Clearly, there is a similar ideology shared between [Forstmann and Davis]. She does business in a certain way, and her imprint is being felt. She's a very direct and forceful person.”

Forstmann's adventures in telecom now consist of investments in McLeodUSA and XO Communications, both public companies in which his stake is 10% or less. While telecom may be a different animal than the aerospace industry, Forstmann and Davis seem to be taking the Gulfstream venture's heavy-handed approach to McLeodUSA.