MFN woes are metro indicator

While Metromedia Fiber Network executives are holed up in meetings strategizing a way to survive their economic time bomb, the rest of the financial world is scrutinizing their business plan and assets.

With a July 30 deadline looming, Citicorp USA agreed to provide $62.5 million with the caveat that the provider secure $287.5 million in commitments from other sources and $200 million in vendor financing by Aug. 15.

Special Report MFN's service provider base

Although MFN wouldn't comment on the record, the company said it had received commitments for $180 million of that $287.5 million. Those commitments are contingent on closing vendor financing and Citicorp financing.

“They will get their money,” Kaufman Brothers analyst Vik Grover said, adding that commercial lenders would not extend the credit facility for another two weeks if they didn't have faith.

One of MFN's largest stakeholders, Verizon Communications, said it would take a $900 million write-down on its investment in the company.

MFN's survival is crucial for Verizon, which would “have a heart attack,” if MFN was forced to sell its assets, said Daniel Flohr, CEO of FiberCity Networks.

FiberCity has dark fiber indefeasible right-to-use (IRU) contracts with MFN, and while Flohr doesn't want to see the company go bankrupt, he doesn't believe the facilities FiberCity uses are at risk. “In the event of a bankruptcy, they won't turn [everything] off and disconnect the dark fiber,” he said.

Other MFN service provider customers shared that sentiment.

“A 20-year IRU doesn't just go away,” said JR Roedel, vice president of strategic development for GiantLoop Network, which uses dark fiber from MFN. “Legally, we own the rights to [the fiber].”

Anticipating some trouble at MFN, Cogent Communications negotiated additional protective measures into its contract with the company. “[The renegotiation] allowed us to do things such as construct our own laterals,” said Dave Schaeffer, founder and CEO of Cogent.

And while MFN customers seem confident that the assets would simply change hands, most have contingency plans. If MFN fails, FiberCity will turn to providers such as Con Edison Communications and Keyspan, Flohr said.

GiantLoop, meanwhile, uses at least three fiber providers in each city, Roedel said. “There is no one provider that can serve all of our customers.”

That a major metro optical carrier could be in trouble is significant in itself. Many providers in the space had a false sense of security, in contrast to those in markets such as long-haul transport.

MFN's problems illustrate that no segment is immune to the downturn, Schaeffer said, who added, “most investors believe there are fundamentally sound business opportunities in the metro.”

“It takes a lot of money before you can generate revenue, and the VCs lost interest,” said Jeanne Schaaf, senior analyst at Forrester Research.

Ironically, metro carriers may fail as a result of strong demand. According to Bruce MacVarish, senior director of strategic development for Ericsson's data backbone and optical networks group, a number of wireless carriers that are prime metro customers are interested in building their own fiber networks and moving away from leasing capacity.

“In the last four to six months, we've had four or five discussions with mobile operators about this,” he said.

Peter Rust, CEO of Con Edison, is trying to avoid being lumped with other metro carriers. “In the metro, a lot of [providers] just build POP-to-POP, but that is becoming commoditized,” he said. “We build POP-to-building and still feel that is fairly sheltered.”

Rust argues that MFN's business model isn't inherently flawed, though it has become convoluted by acquisitions such as AboveNet Communications, SiteSmith and PAIX.net.

“Those businesses probably weren't as accretive [as they thought],” Schaeffer said. “They are suffering from the defocusing of their business plan.”

With a core competency in construction, MFN's financial and human attention to the subsidiaries may have caused a slow down of the dark fiber business. The company built out rings in numerous cities but began to fall short on laterals from those rings, Flohr said.

That theory of diversifying services to create a stronger business may have been one of the company's great flaws. The company also built out too fast, Rust said. “The capital dries up, and then you are in trouble,” he said.

In consideration of that dearth and a stock price below $1, long-time MFN supporters including Salomon Smith Barney's Jack Grubman have downgraded their ratings on the company.

Grover believes the company will survive and bashed others for jumping on the naysayer bandwagon.

“It doesn't take much courage to be bearish on a 75¢ stock,” he said. With the kind of backlog, assets and stakeholders that MFN has, “I would be amazed if this went [to bankruptcy],” Grover added.

MFN's service provider base
Contract date/ Terms	Carrier	Asset
June 6, 2001 20 years	Deutsche Telekom	Metro and long-haul fiber along New York-Washington, D.C., backbone
March 14, 2001	Global One  (France Telecom)	Backbone capacity in eight U.S. markets
Nov. 1, 2000 $100 million	GiantLoop	Dark metro fiber in Europe
July 31, 2000 20 years/ $432 million	Intellispace	Metro rings and in-building fiber in 67 domestic and international markets
May 30, 2000 20 years/ $432 million	SBC  Communications	Dark metro fiber in 30 U.S. markets
March 15, 2000 20 years/ $125 million	Yipes Communications	Metro fiber in seven U.S. markets
Feb. 28, 2000 20 years/ $100 million	Cogent Communications	Metro fiber in 11 U.S. markets
Oct. 15, 1999 20 years/ $550 million plus $1.7 billion investment in MFN	Bell Atlantic	Dark metro fiber in 50 markets
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