The final chapter?

Turns out Time Warner Telecom did not save GST Telecommunications' day. Time Warner's letter of intent to purchase GST for $450 million expired June 13 without the two companies reaching an agreement. What seemed a done deal is undone and, as a result, GST will auction its assets.

To add to the intrigue, AT&T, owner of 5 1/2% of Time Warner Telecom through its merger with MediaOne, had challenged the Time Warner deal, claiming that Time Warner's request for three weeks was not enough time to evaluate the deal, said Bob Meldrum, senior vice president of marketing and communications for Time Warner. "We looked at [GST] and valued it at what is fair," he said. "The longer it takes to close the deal, the less valuable the company becomes."

AT&T and Time Warner are both expected to take part in the Aug. 4 auction.

"AT&T has deep pockets," said Carol Shobrook, analyst for New Paradigm Resources Group. "It wouldn't be a surprise if GST got a better offer with the auction."

Valuing GST's assets at $900 million, company officials - and GST's committee of unsecured creditors - chose the auction route to get a better deal, said Tom Malone, interim president and CEO for GST.

"At $450 [million], many felt it was possible to receive a higher bid for the assets," he said. "That's why, with bondholder support, we concluded we needed to open up the bidding process and to allow the letter of intent to expire."

But with a $1.2 billion debt, even if the company gets $900 million, its shareholders will have the most to lose, said a source close to the company.

"The shareholders stand to lose everything. Only the top executives will make anything," the source said. "Even if the company gets what it's worth, it's still less than the billion that's owed, and there will be nothing left to pay the shareholders."

GST was negotiating with Time Warner as early as March and could have reached an agreement before filing bankruptcy, added the source. GST's board also rejected several funding offers, saying that the company did not need the money, the source said.

The company declined to comment on any failed mergers, acquisitions or asset sale transactions, said a GST spokeswoman.

GST may have put all its eggs in one basket, Shobrook said, referring to the service provider's Hawaiian assets, which were for sale for a long time. Although MBN Communications bid on the Hawaiian assets, the two companies have not yet reached an agreement.

"They [GST officials] were counting on selling those assets for so long," Shobrook said. "Early in the year, it could have helped."

There are many lessons to be learned from GST's troubles, Malone said. "I'm not here to judge. But what is clear is that this company pursued too many businesses, and the lack of focus caused us to spend money in so many areas that we never really drove any one of them to completion."

"There are important lessons here about focus, accountability, a performance matrix and leadership," he added.

GST's future will follow one of two paths: It will be sold at auction, or GST's shareholders and a committee of unsecured creditors could reject all bids and re-launch the company, if they believe such action will produce a better return, Malone said.

Competitive local exchange carriers across the country are merging, hoping to avoid the recent spate of CLEC failures.

Gabriel Communications joined with TriVergent Communications last week, combining its Midwestern and Southeastern territories into one region. By the end of the year, the companies expect their combined territories will reach 30 markets and include 350 co-location facilities. The driving force for the transaction is taking the business scale and scope to a higher level, said David Solomon, CEO for Gabriel.

Earlier in June, Cavalier Telephone, Conversent Communications and Florida Digital Network joined to form elantic, a CLEC spanning from Maine to Florida.

By merging, CLECs can create a much stronger regional play, said Steven Weinberg, analyst for New Paradigm Resources Group. To survive in this competitive market, CLECs don't have the time to build out their own networks; instead, they have to expand by merging, he added.