Forstmann bets on McLeod

Ted Forstmann is no longer waiting in the wings on his $1 billion investment in McLeodUSA.

In anteing up an additional $100 million, Forstmann has installed himself as chairman of the McLeodUSA's executive board and has brought in a handpicked team of veterans from former Forstmann ventures including several from Gulfstream Aerospace, the private jet manufacturer Forstmann Little resurrected a decade ago.

Forstmann hopes to work the same magic on McLeod, and at the deal's formal announcement he made no bones about the fact he's there to protect his investment. “The steps that we have announced now provide McLeodUSA with the right capital structure, the right combination of people and the right people in the right places,” Forstmann said. “We're about growth with safety.”

Forstmann's move toward a more active role is markedly different from the way he handled Forstmann Little's other investment in the beleaguered competitive local exchange carrier sector. Since January of 2000, Forstmann Little has invested $1.5 billion in XO Communications.

Since Forstmann began funneling money into the carrier, XO has scaled back expansion plans and watched its stock plummet from a high of $60 per share to below $2. Forstmann owns a 22% stake in XO and has provided a healthy portion of the money XO needs to survive before profits kick in.

With last week's $100 million infusion in McLeod, Forstmann has effectively doubled his stake in the company to 20%, providing the necessary capital to get the company to the nirvana of positive free cash flow in 2003.

The difference in the two investments is Forstmann's involvement.

Forstmann has learned from his XO experience and will take more of an active role in McLeodUSA's resuscitation, just as he did with Gulfstream, said one equities analyst who requested anonymity.

“Forstmann decided this time to get his hands dirty,” the analyst said.

The financial community had mixed reaction to the news, which included McLeod lowering guidance for the year.

Daniel Zito of Lehman Brothers said the lowered guidance could be interpreted as ominous, but Forstmann's $100 million and an agreement to sacrifice an additional $175 million in dividends puts McLeod on much sounder financial footing.

“They're taking issues of liquidity off the table for the near term,” Zito said. “I'm much more comfortable with where McLeodUSA is today with these changes than I was yesterday without them.