Surviving Cash Crunch

When Russ Intravartolo talks about his company’s future, he smiles like a fox that has just found a back door in the henhouse.

His company, StarNet, is among North America’s largest and most successful wholesale providers of Internet access, and now it’s moving to become a leading broadband access provider. A recent deal with Motorola gives StarNet exclusive rights to a new broadband fixed wireless technology, which Intravartolo believes will leapfrog DSL and cable modems in many lucrative markets. But there’s a hitch.

"We’re having to limit our new business growth because of outside capital limitations," Intravartolo says. His tone betrays annoyance because lenders don’t see StarNet’s opportunity the way he does. StarNet is profitable to the tune of $600,000 per employee, and its 1,100 points of presence and relationships with numerous retail ISPs put it on solid ground for deploying a new broadband network. With the combination of market demand and StarNet’s enviable position, the company "should be able to get debt funds. It would be nice to be able to exercise choices," he says.

StarNet has accessed some mezzanine-level debt financing, but other options seem closed. Venture funding could help, but Intravartolo is loath to give up ownership in such a promising business, which he started five years ago with $60,000 and a lot of legwork.

So he is being careful and conservative about StarNet’s growth, pursuing 500 deployments throughout 2001 at cell sites that will serve up to one million customers. To make this goal attainable, StarNet worked out 60-day terms with its suppliers, which Intravartolo says is sufficient breathing room to keep its growth steady, since the equipment at each site is expected to pay out within two months.

Tough Medicine
StarNet’s story illustrates a current trend among competitive service providers of all types. While they may be frustrated by today’s tight financial markets, survivors are doing what it takes to keep going.

Sometimes survival requires a dose of tough medicine. New Edge Networks, for example, announced plans in November to eliminate 135 jobs from its 455-person workforce in a struggle to stay alive.

The carrier provides wholesale DSL services to semirural markets and has achieved profitability by focusing its attention on customers that major ILECs have overlooked. However, because the debt markets have gone sour, New Edge has been forced to scale back its nationwide build-out strategy and plans to consolidate its office locations.

The move allows New Edge to stretch a $140 million cash infusion it recently obtained from Goldman Sachs. And while the bank debt that the company was counting has dried up, CEO Dan Moffat remains philosophical. "The pain of watching our entire company hit the wall later is deeper than the agony of cutting jobs now. We want to ensure the overall survival of our company," he said.

Another approach to survival is the strategic alliance. NorthPoint threw in with Verizon, and Covad sold 6 percent of its shares to SBC for $150 million.

And in early November, Gabriel Communications and TriVergent Communications completed their merger, creating a stronger company with a larger customer base. When the merger closed, Goldman, Sachs & Co. — the companies’ major equity benefactor — led a consortium of lenders to provide $225 million in 8-year, secured credit.

"We continue to believe investments in top-notch emerging broadband service providers like Gabriel and TriVergent have significant potential for appreciation," said Byron D. Trott, managing director with Goldman Sachs. "The long-awaited consolidation of the industry is underway and presents attractive growth opportunities for well-managed companies with strong financial backing."

Of course, strong financial backing is one of the things that makes it possible for service providers to pursue such growth opportunities. Genuity is one Internet infrastructure services company with plenty of financial support for its expansion, and investment-grade ratings in November from Moody’s and Standard & Poor’s made it that much easier. Genuity wasn’t hurting before, with a $2 billion revolving credit facility on tap, as well as another $2.5 billion in standby credit from sister company Verizon. But investment-grade ratings give Genuity access to more affordable debt capital.

"As many of our competitors are now worrying about their ability to fund operations, we can remain singularly focused on the customer and winning the battle in the marketplace," said Dan O’Brien, Genuity’s CFO.

Which brings us back to the henhouse. While StarNet and many other carriers are struggling to figure out how to fund their business plan going forward, the future holds great promise for companies that can adapt to the tighter capital environment. Thus, service providers who figure out how to get in the back door will find ample reward for their efforts.