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This isn't supposed to happen. Bankrupt companies are not supposed to buy other companies, especially when those other companies also are bankrupt. Yet 360networks is doing exactly that.

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Briefing Room

It's early November 2002, and though the Canadian wholesale fiber carrier is just days away from announcing its emergence from a bankruptcy and restructuring period lasting more than 16 months, company officials already have moved beyond that milestone. They're more concerned with the next phase in their corporate turnaround.

A seven-member team of negotiators from the Vancouver, B.C.-based firm is in Toronto, crafting a deal for 360networks to acquire fellow bankrupt Canadian company Group Telecom. Chris Mueller, freshly promoted to the position of vice president of corporate development at 360networks, is logging 17-hour days, 7 a.m. to midnight every day, trying to close a deal that hinges on two companies emerging from bankruptcy, and one of them having the money to get the deal done. “One day, I swear I was on the phone for 15 hours [with corporate headquarters],” Mueller said weeks later.

Negotiating the deal not only goes against the conventional wisdom of how companies in bankruptcy are supposed to behave, it also defies the belief that the fiber carrier business remains a dangerous money pit in which the real value of corporate and network assets of troubled companies is impossible to gauge.

Weeks earlier, 360networks had announced that multimillionaire investor and bankruptcy specialist Wilbur Ross was buying 13% of the company's debt securities and 10% of its new equity upon its emergence from bankruptcy, and that Ross and 360networks were “looking at partnering on acquisitions.” But this wasn't Ross' deal, Mueller said. This was a bold offensive conceived, planned and now being executed by the officials of a bankrupt carrier using its own cash.

To add further perspective to the confidence of the move, it was being performed in the midst of a market in which 360networks competitor Level 3 Communications — flush with $100 million from investment guru Warren Buffet months earlier and vocally committed to hunting for acquisitions — had so far failed to find any worthwhile bargains. 360networks had to be well aware of the dangers. It had learned a difficult lesson about the roller-coaster changes in perception of corporate value just days after it filed for bankruptcy.

“We tried to sell the company right after we filed,” Mueller said. “Nobody showed up.”

That dearth of offers left Greg Maffei, then president and CEO of 360networks, and his management team with few options. Maffei — who had come to the firm from Microsoft in January 2000 amid much fanfare and expectations that he could give a relatively unknown Canadian company a new public identity — stood at the precipice of a grand failure.

If at that point Maffei had resigned, been forced out or left powerless in a debtor liquidation of 360networks' assets, his name would now be spoken in the same critical tone reserved for the many once-celebrated executives from big firms who took over much-hyped start-ups and quickly flamed out. He and his team, seemingly backed into a corner and surrounded only by angry corporate lenders and nervous creditors, were being urged by their lenders to liquidate.

“We looked at liquidation,” said Maffei, who was named chairman and CEO after the company came out of bankruptcy. “Your banks always want you to look at whether or not to liquidate all your assets. We had to convince them not to do that. We decided we could reduce our debt.”

That was 360networks' first step on the road less traveled by bankrupt firms. It had not, like an increasing number of debt-challenged companies, filed for a prepackaged bankruptcy with debtor-in-possession financing in place. Any corporate comeback for 360networks would be a little messier.

Maffei and company faced the challenge of coming up with a restructuring plan that could rapidly melt a $2.7 billion mountain of debt and lure new financing in the midst of a lingering telecom industry bust. While 360networks set to work, many in the industry probably thought they would never hear of the company again.

It was more than a year before anyone did.

While some members of his management team were in Toronto, consumed by secret negotiations with Group Telecom, Maffei was back at 360networks' office in Seattle, busily preparing to make the official announcement of his company's return from bankruptcy.

Talking quickly and incisively, the rhythms of his speech like mathematical computations tumbling into each other, Maffei betrayed no hints that his still-bankrupt company had taken the unorthodox step toward the acquisition of another bankrupt carrier. Cagey on the whole subject of fiber carrier consolidation, he said, “Consolidation in this market seems inevitable, but there are serious challenges in acquiring right now. There has been a lot of flirting going on, but you have to be careful.”

Reflecting on Level 3's well-known intention to bargain-hunt for fiber network acquisitions, Maffei spoke like a father too consumed with raising the children he has to begin thinking about having another one. “We have tremendous respect for Level 3,” he said. “We hope they can help consolidate this industry.” He also was graceful in deflecting the obvious: “I don't think that we're a target for acquisition ourselves, but for our shareholders' sake, we would listen to any offer.”

What else would you expect from the leader of a company that was supposed to be consumed by its own imminent and step-wise emergence from bankruptcy?

Instead, Maffei seemed focused on the restructuring process itself, saying, “This is the first time I've felt really bonded to a difficult restructuring challenge.”

It was a much different challenge than he faced when he joined the company. The job ahead of him then was building a company from a modest starter kit — and getting someone to notice.

The first week of the new millennium was a time still full of hope for the telecom industry. People talked about the possibility of a telecom bust, but no one saw a reason to stop investing, building, buying and selling at the frenetic pace that characterized the industry for the previous two years.

At that time, the company that eventually would be renamed 360networks was known as Worldwide Fiber. Though not widely recognized as a force in the fiber wholesale business, it had actually been one of the pioneers of the market. As the new millennium dawned, Worldwide Fiber found itself at the center of an explosive market for capacity — though in retrospect one based more on the hopes of vague, promised applications than the reality of existing demand. Unlike Level 3, Global Crossing, Qwest Communications, Pathnet and other fiber wholesalers, Worldwide Fiber wasn't a start-up but the 12-year-old subsidiary of a 55-year-old, private, family-owned construction company called Ledcor Industries.

Run by brothers David and Clifford Lede, Ledcor took on its first telecom project in the early 1980s, a deal with Bell Canada to manage the carrier's fiber network migration.

By 1988, the Ledes realized this project was just the tip of an ever-expanding iceberg — fiber was in huge demand by a growing number of telecom firms in Canada and elsewhere around the globe. However, the most difficult hurdles to overcome for these telecom service providers were getting the rights-of-way necessary to build networks, not to mention finding the money and time for the actual construction.

So the Ledes negotiated a deal with the Canadian National Railroad to plant fiber in trenches along the railroad's rights-of-way. Ledcor's new division, Worldwide Fiber, was born.

Over the next 10 years, Worldwide Fiber grew into a very successful business. However, by 1998, the company was joined by plenty of competition, a trend driven mostly by deregulation in the U.S. and Canadian telecom industries. Firms were responding to what seemed like an endless demand for fiber capacity from other telecom service providers and their customers. High-profile CEOs — James Crowe at Level 3, Joe Nacchio at Qwest and Bob Annunziata at Global Crossing — gave competitors a visibility Worldwide Fiber couldn't match. And with Ledcor still its parent company, Worldwide Fiber didn't have the telecom-specific reputation the others had, either.

But the Ledes swiftly corrected perceptions. In1999, they rapidly expanded their network into the U.S. and other countries through deals with other fiber network operators including Qwest, Williams Communications and CapRock Communications, a wholesaler serving the Southwestern U.S.

Then came the announcement that truly put the company on the map: Seemingly out of nowhere, Worldwide Fiber hired Maffei, then in his fourth year as chief financial officer of the biggest software company on the planet.

Microsoft-watchers were well aware at the time that Maffei was growing restless in his job, as was attested to by rumors that he was leaving the company for Apple Computer and other firms. News of his departure didn't raise many eyebrows in the software sector.

However, the news was a surprise to some in telecom and the subject of much criticism. Telecom purists labeled Maffei a “software guy” out of his element, competing against the so-called “Fiber Barons” of telecom. Also, there was criticism of Maffei's hiring package, which included a deal under which Maffei received a $77-million loan to buy stock in his new employer. 360networks' IPO in April 2000 raked in about $1.4 billion. Despite the mild controversy, the company was now a major player.

To telecom survivors with the hardened hindsight that comes with watching so many companies come and go, 360networks' rise and fall might now appear difficult to distinguish from the milestones and mistakes that marked the existence of dozens of other firms. For example, the fiber wholesale industry has been rocked by controversy over its practice of booking long-term indefeasible rights of use contracts (IRUs) with its customers and partners. When the industry's economic decline began, many of the buyers who signed these contracts tried to back out of them or renegotiate them. In one highly publicized case, buyer 360networks did so with seller Global Crossing.

“In retrospect, we probably did a lot of things wrong,” Maffei said recently. “Did we help skew the demand for buying and selling IRUs [indefeasible rights of use contracts] in the past? Maybe, but it was a mistake that everybody made.”

Aside from practices that unrealistically ballooned revenue expectations, 360networks, like other firms, spent a stunning amount of money building out and acquiring new network facilities. It acquired entire companies such as foreign carrier Globenet, and it bought facilities outright from firms in Europe and Asia. In mid-2000, 360networks touted a plan to construct a submarine fiber cable in the Pacific Ocean between the U.S. and Asia, a more ambitious project than even Global Crossing's trans-Atlantic cable project.

But network expansion costs sent the company's debt load soaring past the $2 billion mark in early 2001. That's also when the first serious rumblings of a bandwidth glut made their way to investors.

Conservative investors and industry observers had bandied about the possibility of a glut for some time. They were concerned that 360networks and its competitors were over-building their networks too quickly to meet the demand of applications that were still on the drawing board and nowhere near generating real revenue. However, Wall Street investment firms hadn't been buying the concerns — they were only buying and recommending the stock. Even when some segments of the telecom industry, such as the CLEC market, began to fail a few months after Maffei took the helm in 2000, it only seemed to ratify what 360networks and other fiber network operators were doing and many CLECs weren't: building and operating their own networks. But Wall Streeters began to withdraw their bullish ratings in early 2001, and 360networks and its brethren could no longer count on their stock to fund acquisitions and equipment, and to make debt payments on their purchases.

About this time, the fiber wholesale market caught the eye of Wilbur Ross.

A multimillionaire with a soft and grandfatherly voice that reveals little emotion, Ross had launched his WL Ross & Co. investment firm in 2000 after 25 years running bankruptcy operations for Rothschild Securities, where he had earned the daunting nickname “The King of Bankruptcy.”

“The optical fiber market was an accident waiting to happen,” Ross said. “We saw Wall Street fund these guys to the hilt and raise their valuations too high, but didn't back them when they had amassed all this debt from building these networks.”

And for 360networks, the fall into bankruptcy came with very little struggle. It missed a debt payment on June 20, 2001, and filed for bankruptcy in both the U.S. and Canada one week later.

At this point, you might have realistically expected that it was about time for the “software guy” to flee telecom. CEOs running away to hole up in their mansions in times of bankruptcy and scandal has become such a common occurrence that maybe you even assumed Maffei did the same.

But instead of disappearing, 360networks got the CEO commitment that many less fortunate bankrupt telecom firms never did. Right at the moment when 360networks most needed a leader with deep financial experience and acumen, Maffei responded.

“Why am I doing this when I don't have to?” Maffei said. “Partly because I feel an obligation to our employees, but also because I feel there are still real opportunities out there.”

Even if you don't want to believe that, it's hard to argue with the results. Though Maffei said his entire management team worked hard to convince the company's debt holders and creditors to accept a restructuring plan over liquidation, Mueller and 360networks chief operating officer, Jimmy Byrd, give the credit to Maffei himself. “His reputation and credibility in the financing world undoubtedly helped him accomplish that,” Byrd said.

In the ensuing months, Maffei and his team went to work slashing costs and debt. “We completely reconfigured financially, cutting our monthly costs from $21 million to under $7 million per month,” Maffei said. “We did it through head count and office reductions, through cutting our co-location costs and moving some facilities, through retreating from Latin America and Europe, and selling a fiber cable manufacturing business.”

When the company's more than 30 creditors were made aware of the plan, 98% of them voiced their approval, Maffei said. U.S. and Canadian bankruptcy authorities approved the restructuring plan in June 2002, and Maffei and Byrd filed public comments with these authorities and with the SEC saying that 360networks was targeting September 2002 for its coming-out party.

Somewhere around late summer, Ross met with Maffei and company. “We just stumbled across him,” Maffei said vaguely, though Ross said that he had been watching the company's recent bankruptcy filings closely. They negotiated Ross' purchase of 360networks' debt securities and announced the deal in October, though the company remained in bankruptcy while final, minor details were worked out.

By November, 360networks may have been a little bit late for the party it thought would happen in September, but was still determined to have fun once it got there. Having to make many difficult decisions, including layoffs that downsized the company's work force from almost 2000 people to about 400, Maffei was focused on making the existing company work, sticking with a business model that some people believed no longer applies.

According to Lynda Starr, vice president of Probe Research, fiber prices have dropped by up to 70% since the late 1990s. Also, she said in a report on long-haul fiber the old myth of Internet traffic doubling every 100 days has become the reality of traffic doubling only every 30 months.

But Maffei is persistent about making the fiber wholesale business model succeed. “The biggest difference in the company now is that we have been able to reconstruct our financials and build cash into the company so that we have an excess of about $100 million in cash coming out of bankruptcy,” he said. “We expect $25 to $50 million in revenue a year. We are showing that the business model still works.”

Ross believes Maffei is right. “Their network was among one of the last such networks to be built, and incurred all that debt and went bankrupt before significant revenue could be generated,” Ross said. “Now it's doing that.”

Byrd said some new revenue could be realized by expanding 360networks' customer target from just long-haul carriers to local carriers and large enterprises. It was the seed of that thought that germinated the bid for Group Telecom. “If we are going to have new customers, we need new touch points to support that — new facilities that have access to those channels and can give us diverse customers,” Byrd said.

According to Rick Coma, vice president of products at 360networks, the company has an optical VPN service, but not one specifically designed for enterprises. “Our target for OVPN is the carrier or ISP, which might want to move up to using OC-12 ports for point-point backhaul. I wouldn't exclude enterprises from being a target for this, but enterprises are typically not co-located in carrier hotels, so it would be an added expense for us to offer it to them.”

Coma added that the OVPN offering also creates an opportunity for 360networks to get business from cable TV companies supporting cable telephony. However, as Byrd indicated, if 360networks makes other less-than-subtle changes in its revenue potential, those changes will come through acquisition and the accessibility to new channels and customers.

“Our theory about long haul is that it does need to be consolidated,” Ross said. “We're looking at acquisitions in the U.S. and elsewhere. The risk of operating in this market will be lessened through consolidation.”

Nov. 12 was the day 360networks finally announced its emergence from bankruptcy. Six days later came the surprising announcement about the GT acquisition.

Contrary to expectations of those who were aware of the Ross investment, 360networks didn't use a loan from its new best friend to make the deal work. Though Ross became the backstop for the deal, he didn't have to fling off his catcher's mask in pursuit of any runaway pitches. Rather, 360networks, as it had intended, was pledging its own money. As of this writing, the GT acquisition was expected to close in mid-February.

“The GT deal was highly unusual because it was virtually one company in bankruptcy buying another,” Ross said. “[Maffei and his management team] basically planned and negotiated the GT acquisition while they were still in bankruptcy. All GT needed was an assurance that someone would back them up.”

After the GT announcement, Byrd confirmed that there would be more deals to come. “We have some gaps in the metro and regional business — GT covers both really well across Canada. There is not a company that does that in both segments in the U.S. so they will be different deals,” he said, adding, “Some deals out there are going to be ugly ducklings that lay the golden egg — you have to go with your gut feeling on some of them and take that risk.”

So far, no other buyouts have materialized, though other possible acquisition opportunities have surfaced. Digital Teleport, a bankrupt U.S. fiber network operator, sought a court approval for a bankruptcy auction earlier this month, having already received a buyout offer from CenturyTel. 360networks so far hasn't challenged it.

“You have to figure out who else is going to show up to the party and bid on these things,” Mueller said. “In some cases, we won't show up to bid for what could be a high-scale bidding derby — unless we want to show up just to spoil the party.”

But Mueller said the company is continually evaluating other merger opportunities. “Greg has a deep Rolodex that helps in determining what's available because he has that corporate financing background and he hears things,” he said.

Though Ross is now on 360networks' board, and could influence the company greatly in its acquisition strategy and pace, he said 360networks isn't his company to run. “That is left to Greg and Jimmy,” he said.

However, he expects to see 360networks engage in other deals quickly. “There are a lot of bargains out there, a lot of bankrupt assets,” Ross said. “There is not so much a sense of competition amid the consolidation because Buffet [with Level 3], Leucadia [the securities firm which has invested in Williams Communications] and 360 are the few bidders that keep showing up. Is there really anybody else?”

And as 360networks makes it way through a financial recovery and proves Maffei's faith in the business model, it is becoming clear just whom the new “Fiber Barons” are. Said Ross: “This industry is going from being run by a lot of starry-eyed, not-so-pragmatic people to people like us, Buffet, Leucadia and me.” nYou have to figure out who else is going to show up to the party and bid on these [companies],” Mueller said. “In some cases, we won't show up to bid for what could be a high-scale bidding derby — unless we want to show up just to spoil the party.”

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© 2014 Penton Media Inc.

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