GLOBAL CROSSING STARVED BY GLUT

Strategic waffling, leadership turmoil and dependence on sales of raw bandwidth has come back to haunt Global Crossing, forcing the company to cut capital expenses to the bone. With last week’s quarterly miss—the first since its IPO—Global Crossing’s stock was dropped from the S&P 500, and Moody’s Investors Service cut the company’s debt deep into junk territory.

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"The issue is whether the company will survive or go bankrupt," said Patrick Comack, senior analyst for Guzman & Co. "It’s a coin flip. For the first time there is a going concern risk."

The uncertainty isn’t helped by the fact that Global Crossing named John Legere its fifth CEO in four years last week. Legere, who was head of Asia Global Crossing, quickly fired President and Chief Operating Officer David Walsh. "It’s time for him to move on," Legere said.

The company put in a heroic effort to hit projections, negotiating with customers into the waning hours of the quarter on the last Sunday in September, but it wound up turning down bandwidth capacity deals with unfavorable pricing.

Global Crossing missed third-quarter estimates in part because cash sales of long-term, wholesale capacity to other carriers plummeted by more than 50% to $225 million.

Dan Cohrs, executive vice president and chief financial officer of Global Crossing, thinks the market is overreacting.

"Guess what? We missed one," he said. "People are acting as if the world’s just ended."

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But the miss has ramifications. Global Crossing must reduce its $1 billion per quarter burn rate and generate EBITDA to cover $700 million in interest payments in 2002. If it doesn’t, it could be in violation of debt covenants, although Cohrs is confident that lenders will renegotiate terms. Three quarters of that $700 million will need to come from wholesale bandwidth contracts—known as indefeasible rights of use, or IRUs—or proceeds from the planned sale of the Global Marine Systems division and its IPC desktop trading system unit, Cohrs said.

But IRU sales are the cheap drug that made this day inevitable, analysts said. Global Crossing relied heavily on selling bandwidth to carriers and underachieved selling international private lines, ATM ,frame relay and VPN services to enterprises.

THE CEO SAGA April 1, 1998 Jack Scanlon named CEO Aug. 14, 1998 Raises $399 million through IPO Feb. 24, 1999 Bob Annunziata named CEO March 17,1999 Signs $11.2 billion merger with Frontier March 2, 2000 Leo Hindery, Jr. named CEO Sept. 28, 2000 Sells GlobalCenter business to Exodus Oct. 11, 2000 Thomas Casey named CEO Oct. 4, 2001 John Legere named CEO

A revenue rebound in IRU sales is unlikely any time soon because fervid competition in undersea bandwidth has eroded wholesale prices per mile by 40% or more year-over-year since 1999 , according to research by Friedman Billings Ramsey. Prices are expected to slip an additional 58% by the end of 2001and another 40% next year.

According to Michael Ruddy, a research director at Terabit Consulting, Global Crossing based its undersea cable buildout on its experience in 1998, when it sold gobs of bandwidth on its Atlantic Crossing 1 cable because of pent-up demand and a lack of competition. Now Global Crossing goes up against the likes of TyCom, which has a lower cost base because its systems have higher terabit capacity.

And IRU sales, in which customers pay cash up front for 10 to 20 years’ worth of capacity, could morph into multiyear leases in which the customer pays over time, said Dan Reingold, analyst for Credit Suisse First Boston.

Legere and Cohrs maintain that IRU sales will come back in 2002 because carriers have worked through their inventories and are using more than 50% of capacity. "The net work planners are screaming to buy capacity, and the CFOs won’t let them ," Cohrs said. Because they doubt Wall Street will buy that, however, Legere and Cohrs are crafting a business plan that weans the company off its dependence on wholesale capacity deals.

"The IRU business has always been somewhat of a mystery," Legere said. "We’re going to lay out a plan and stop this charade."

Over the years, Global Crossing has made several moves on the M&A front to bolster its retail presence, but it made an about-face each time. It merged with Frontier in 1999 to bring in Web hosting capabilities, a U.S. fiber backbone and a $3 billion long-distance business. Rural local exchange assets were subsequently sold off, and Global Crossing sold its Web hosting business to Exodus Communications.

Exodus’ Chapter 11 filing forced Global Crossing to write off its $4 billion in Exodus stock and kiss $5 billion in revenue over the next decade goodbye.

Now the company plans to embark on a deal that would bring the rest of Asia Global Crossing under the corporate tent. But Global Crossing already consolidates Asia Global Crossing’s results into its own so there won’t be any revenue boost, and the company will have to issue at least 200 million in new shares to buy the remaining 43% stake, resulting in significant stock dilution, Reingold said.

Meanwhile, Global Crossing has to deal with upcoming cash problems. According to Frank Governali, an analyst for Goldman Sachs, Global Crossing’s fully funded status depends on sales of its IPC and Global Marine divisions.

The assets sales could bring in between $400 million and $800 million, but get ting a good price for the Global Marine division, the larger of the two, will be tough. Potential suitors, including Alcatel, TyCom and Japanese players KDDI-SCS, NEC and Fujitsu, have financial problems of their own or duplicate assets.

Moreover, the industry expects 2002 to be the lowpoint for undersea cable deployment, Ruddy said. "The undersea cable market will come back, but it will take a couple of years."