ICG Goes to Venture Capitalists

ICG Communications Inc. emerged from bankruptcy two years ago, but the restructuring did not lead to prosperity.

In fact, the Englewood, Colo., telecommunications company disclosed this fall in a proxy statement filed with the Securities and Exchange Commission that it would likely have to file for bankruptcy again and liquidate assets if it did not complete a strategic agreement. In October, however, venture capital firms Columbia Capital and M/C Venture Partners acquired the company following negotiations held over the summer.

M/C Venture Partners and Columbia Capital “made a pretty contrarian move buying ICG,” says Peter Claudy, a general partner with Bostonbased M/C Venture Partners. “That was a heavily shopped business.”

Now private, ICG will no longer make its financial statements available to the public, but the company did not waste any time making a strategic move under its new owners. ICG announced an agreement in October to sell network assets and its wholesale and retail customer base in California to Mpower Holding Corp. Under the terms of the agreement, Mpower will issue about 10.74 million shares of common stock valued at $13.5 million and warrants entitling ICG to buy 2 million Mpower securities for about $1.38 per share. Mpower also will assume certain leases in California, including long-term fiber capital leases. In connection with the acquisition, Mpower says Columbia Capital and M/C Venture Partners will invest $2.5 million in nearly 2 million shares of Mpower common stock.

“The decision to sell our California market is consistent with our strategy to focus on our core regional assets and VoIP services,” says ICG’s newly appointed President and CEO Dan Caruso, who was a founding executive member and officer of Level 3 Communications Inc.

ICG is among a fleet of competitive telecom companies that eliminated billions of dollars in liabilities in recent years through restructurings under bankruptcy law. In October 2002, ICG announced emerging from bankruptcy with approximately $205 million in debt and $94 million in cash.

But the next year would prove to be a challenge for ICG. In September 2003, the company terminated early four dialup data services agreements with Qwest Communications International Inc., previously ICG’s largest customer. ICG subsequently began cost-cutting initiatives but “those efforts … were insufficient to stem significant ongoing operating losses,” according to the proxy statement filed with the SEC, which detailed for ICG shareholders the proposed transaction with M/C Venture Partners and Columbia Capital.

In February 2004, ICG retained Lehman Brothers to enter a strategic transaction. As part of the search, Lehman Brothers had discussions with more than 60 potential strategic and financial buyers. The talks involved a number of alternatives, including a third-party capital investment, the sale of substantially all of the company to one buyer and a piecemeal sale to multiple buyers, according to the proxy statement.

From the middle of February to mid-July, the ICG board of directors controlled by entities affiliated with shareholders Cerberus Capital Management L.P and W.R. Huff Asset Management Co. LLC met 16 times to review the status of the negotiations to enter a strategic agreement. Of nine letters of intent the company received, it was the board’s position that only a few contained viable alternatives, according to the proxy statement.

Over the summer, ICG, Columbia Capital and M/C Venture Partners negotiated an agreement, with the investment firms making concessions.

One compromise included an agreement to issue 75 cents per share to ICG shareholders, up from an initial proposal of 50 cents per share.

On July 19, the ICG board approved the agreement. ICG received an unsolicited letter of intent the following month from a former participant in the sales process proposing an alternative agreement, but ICG rejected the proposal. The interested party was not named in the SEC filing.