Forstmann bolsters McLeodUSA

McLeodUSA received a $100 million cash injection from investor Forstmann Little, but it also lowered its revenue and EBITDA guidance for the year, causing its stock to fall about 19% in today’s trading.

The CLEC reported relatively strong second-quarter results.

Forstmann Little agreed to invest an additional $100 million in McLeodUSA in the form of 36.4 million shares of common stock priced at $2.75 a share. The buyout firm also agreed to exchange the $1 billion in convertible preferred stock it bought in 1999 for an equivalent security that carries no dividend. The exchange will save McLeodUSA about $175 million over the next five years.

Additionally, McLeodUSA agreed to lower the conversion price of Forstmann Little’s preferred stock to $6.10 from $12.17. As a result of the transactions, Forstmann will own about 20% of McLeodUSA’s fully diluted equity.

“Bottom line, [McLeodUSA] has solidified is survivor status,” said a report by Daniel Zito, analyst at Lehman Brothers. “With financing worries…largely off the table and a set of reasonable expectations for 2002, management can move beyond the distractions caused by the current capital storm and focus on execution.”

That management includes a new executive team and board. McLeodUSA named Chris A. Davis, former chief financial officer of ONI Systems and Gulfstream Aerospace, to the chief operating and financial officer slots. Davis previously worked with Forstmann Little to help turn around Gulfstream. Steve Gray was named CEO after sharing the spot with Clark McLeod since early in the year. McLeod remains as chairman.

Four new outside directors were added to McLeodUSA’s board: Ed Breen, executive vice president at Motorola and former CEO of General Instrument; Dale Frey, former treasurer of General Electric; Peter Ueberroth, former commissioner of Major League Baseball; and Tom Bell, former chairman of Young and Rubicam. Ted Forstmann, senior partner of Forstmann Little, was named chairman of the executive committee.

“McLeod has always been about offense--gaining and keeping customers,” Forstmann said. “We’re adding strength on the defensive side of the ball, namely financial discipline and rigor. We’re about growth with safey.”

McLeodUSA posted an operating loss of $145.3 million compared with $139.3 million in the year ago quarter. On a per-share basis, the net loss was flat at 24¢ a share. Including one-time items, McLeodUSA lost $165.7 million, or 28¢ a share, compared with $154.5 million, or 26¢ a share in the second quarter of 2000.

During the quarter, the CLEC recorded a one-time gain of $80 million from the sale of assets, including PCS licenses, and a $28 million restructuring charge related to job cuts and a reduction in leased facilities.

Quarterly EBITDA was $34.2 million, up from $1.1 million last year, and revenue rose 43% to $473.6 million from $331.8 million.

For 2001, McLeodUSA forecast slightly weakened 2001 EBITDA of $150 million to $155 million, excluding one-time events, and revenue of about $1.9 billion. Next year the company has set a revenue target of about $2.1 billion to $2.3 billion and an EBITDA target of $300 million to $325 million.

“The guidance suggests to us a more drastic paring back of operational scope, potentially including the discontinuance of Splitrock operations to account for the rather draconian view of 2002,” Zito said.

Zito said the revised 2002 EBITDA forecast, combined with the exclusion of the Forstmann dividend, will let McLeodUSA cover its 2002 fixed interest costs of $293 million.

Clark McLeod said the company would explore further cash-saving measures that could add $150 million to $250 million in cash in the next two years with little impact to EBITDA. McLeodUSA has $142 million in cash on its books and $550 million in an undrawn credit facility.

To conserve cash, McLeodUSA management said the CLEC will reduce its capital spending to $750 million from $1.1 billion in 2001 and about $400 million in 2002.