Mpower scales back

Mpower Communications, a facilities-based provider of data, telephony and Web-hosting services, including voice over DSL, is shuttering 12 markets and laying off employees to close a funding gap.

The company will reduce its work force by 275 people, or 13%, during the next three to four months. Mpower will close operations in Grand Rapids, Milwaukee, Nashville, Orlando, Jacksonville, San Jose, St. Louis, Kansas City, Tulsa, Oklahoma City, Little Rock and Wichita, all of which were acquired in the acquisition of ISP Primary Network last year. Mpower will focus on 28 markets, which represent its most mature markets as well as that offer the best opportunity to quickly achieve profitability, the company said.

The criteria used in deciding whether to close a market were the market’s estimated time to cash-flow breakeven, the market’s size, and the number of customers that would be affected.

“As we looked at the upcoming 12 to 18 months, we had no assurance we could rely on the debt from our equity markets to cover our estimated $75 million funding shortfall,” said CEO Rolla P. Huff.

According to Michael R. Daley, chief financial officer, the company explored senior secured bank debt and vendor debt financings, but institutions do not have any appetite for more commercial paper.

“Even those institutions that might be lenders are offering lending packages that have extremely expensive equity kickers and tight covenants in which to operate,” Daley said.

As a result of the scaled-back plan, Mpower said it eliminated the need for external funding and expects to turn EBITDA positive by the end of 2002 and free cash-flow positive for all of 2004. The market closures will reduce Mpower’s second-quarter revenue by $1.1 million; otherwise, Mpower reiterated previous second-quarter guidance.

For the full year 2001, Mpower reduced revenue guidance to between $180 million and $200 million from a range of $210 million to $230 million. The company’s operating cash-flow loss for the year was revised to $160 million to $170 million from $160 million to $185 million.

Mpower will take a one-time charge in the second quarter of $190 million to $210 million. The writeoff includes $135 million for the goodwill and customer base associated with Primary Network; $40 million for “stranded property, plant and equipment,” including 181 co-location cages, five switch sites, and 12 sales offices; and $25 million for other costs associated with exiting the 12 markets.

Mpower ended the first quarter with $438 million in cash and equivalents, as well as a substantial amount of assets that are unsecured and are therefore available to borrow against, Huff said.

As part of an organizational reshuffling, Mpower named Joe Wetzel president and chief operating officer. Huff, formerly president and CEO, remains as CEO.