Fire sales smolder

The carnage of CLECs littering the market is providing the unexpected benefit of cheap expansion for some of the survivors. As the number of competitive carriers entering Chapter 11 reorganization or shutting down increases, big swaths of network turf are available for pennies on the dollar.

However, most carriers are so concerned about conserving cash and the true cost of expansion that those on the selling end may find themselves scrounging for buyers.

In the last year, many carriers have acquired struggling competitors at what appears to be fire-sale prices (see table). But at least one carrier said the cost of acquiring network assets is much greater than the numbers quoted in press releases.

“People say there's equipment for a dime on a dollar, but it doesn't always work that way,” said Mike Meldahl, president and chief operating officer of TouchAmerica. “Let's say I went out and bought a Nortel DMS250, for example. Nortel will tell you they won't warranty it because it's not the original owner, and maybe you've got to buy a new software upgrade. Is a dime on a dollar enough?”

Other carriers say it's more effective to use resources to drive deeper into existing markets than to expand, regardless of the bargains. While announcing quarterly results last month, McLeodUSA Chairman and co-CEO Clark McLeod said the notoriously conservative company would redouble those efforts this year.

“Given the landscape as we see it today, we plan to be even more conservative than we have been in the past,” McLeod said. “We plan to manage our operations, our expenses and our network construction to maximize cash flow.”

Less than meets the eye

Seller	Claimed assets*	Sale price	Buyer
GST Telecom	$995 million	$690 million	Time Warner Telecom
NorthPoint	$526.6 million	$135 million	AT&T
CapRock	$565 million	$525 million	McLeodUSA
Convergent Communications	$107.7 million	—	Still seeking buyer
ICG Communications	$2.65 billion	—	Not actively seeking buyer
*Claimed assets are as of last reporting period and are before depreciation
Sources: SEC reports, company reports

Even incumbents are in no position to flout market conditions with irrational asset purchases from failing carriers, said Mike Lauricella, an analyst with The Yankee Group.

“There's no excess capital for anyone,” he said. “You're just buying somebody else's problems if you're not careful.”

Just as important, as the fallout from the DSL market continues to take carriers down, those remaining will see even softer pricing on assets.

“Everyone kept hypothesizing when someone was going to jump in and save them,” Lauricella said. “It's become very clear they're going to let people wither away and die until they go down to fire-sale pricing.”

In some cases, large carriers aren't looking to buy network assets but are counting on the desperation of equipment vendors. Qwest Communications, for example, is planning on cutting its capital expenses from $9.5 billion to $9.2 billion over the rest of the year, mostly by putting pressure on vendors.

“What we've been able to take advantage of is an extraordinary favorable pricing environment from our suppliers, all of whom are scrambling essentially for every dollar they can get,” Qwest Chairman and CEO Joseph Nacchio said during the company's first-quarter earnings call. “It's become a buyers' market, and we're taking advantage of it.”

Not everyone can expect the discounts, though.

“I don't think you're seeing vendors cutting sparkling deals now because the economy is bad,” said TouchAmerica's Meldahl. “They're trying to make margin. They've all done layoffs and they've all cut their costs, but they can't go out there and sell equipment below cost.”

One carrier selling assets says it isn't jumping at low-ball offers. ICG Communications, now in Chapter 11 reorganization, is decommissioning some switches and may sell them. But with buyers offering only a fraction of the equipment's value, the company may just mothball switches, said Bob Beaty, vice president of corporate development.

“Given our situation that we're cash-flow positive, one of our options is to hang on to the switch. When people are offering you pennies on the dollar, that's not a hard decision to make.”

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Chris Sewell contributed to this article