The New Global Crossing: Could It Set the Wholesale Market?

Global Crossing Ltd., a carrier’s carrier hoping to emerge from bankruptcy-court protection early next year, would have the flexibility to dictate wholesale prices once its hefty debt is eradicated, a senior executive told PHONE+ in a recent interview.

“Yeah that could provide us a tremendous ability to lower prices in the market,” said Barry MacCheyne, senior vice president of carrier sales. “I am not saying we are going to do that. But that is an option we have that some others don’t have.”

Global Crossing submitted a reorganization plan Monday to the U.S. Bankruptcy Court for the Southern District of New York, detailing a plan first disclosed last month that would give a majority control in the company to Hong Kong-based Hutchison Whampoa Ltd. and Singapore Technologies Telemedia Pte.

The companies would inject $250 million in Global Crossing for a 61.5 percent stake, a third of what they initially proposed to spend in January. Under the reorganization plan Global Crossing’s banks and creditors would hold a 38.6 percent stake, $300 million in cash and $200 million of new senior notes.

The company could emerge from bankruptcy with an estimated equity value of $407 million as early as January or by April depending on court and regulatory approvals.

Global Crossing has about 400 wholesale customers in North America and is picking up 50 to 60 new customers every year, MacCheyne said. Global Crossing mostly has concentrated on retaining its customer base since filing for bankruptcy in January, but is likely to refocus on growing a customer base when the company regains its independence, a spokeswoman said.

The company, which is being investigated by the Securities and Exchange Commission and U.S. Attorney’s Office, also has lost customers in an industry that buckled under cutthroat competition, high debt and slack broadband demand, resulting in a bankruptcy bonanza and an estimated $2 trillion in vanquished equity.

Last year nascent wholesale carriers dueled to win accounts in price wars, but the “how low can you go” game in the words of a senior Baby Bell wholesale executive squeezed margins and made it challenging for companies to meet their revenue estimates, analysts say. Though Global Crossing executives still observe a high demand for IP services, revenue is flat due to dramatic price declines over the last year, MacCheyne said.

However, technology analysts say that is changing.

“The prices are actually stabilizing. I really doubt that even if a couple carriers emerged from bankruptcy that prices are going to fall as steeply as we have seen in the past couple of years,” said Ron Kaplan, a research manager at IDC.

Many long-haul carriers that hope to emerge from bankruptcy with a modest debt load have more flexibility to negotiate wholesale prices than a carrier with higher liabilities, according to one argument. Vancouver-based 360Networks Corp., Global Crossing and Tulsa, Okla.-based Williams Communications Group Inc. are among them.

Global Crossing listed $12.4 billion in debt and $22.4 billion in assets in its January bankruptcy filing, but the company would emerge from bankruptcy under its reorganization plan with $200 million in debt which would mature three years later.

Under a reorganization plan 360Networks would emerge from bankruptcy with $215 million in debt while Williams Communications would eradicate $6.5 billion in claims under its reorganization plan, leaving it with around $525 million in debt, far less than its rival Level 3 Communications Inc. But it is uncertain whether these operators will emerge from bankruptcy under their current reorganization plans. Williams Communications, for example, is wrangled in a legal dispute with its largest and most important customer, SBC Communications Inc., over whether SBC has the right to break or modify a 20-year Master Alliance Agreement.

“I guess it remains to be seen” whether higher leveraged carriers would be at a disadvantage if Global Crossing undercut them on price, Kaplan said. “There is lots of unknowns right now.”

With margins less attractive in the wholesale business than in the small business and enterprise space, long-haul carriers are aiming to improve their profitability on a new account – not shrink it. Dick Notebaert, CEO of Qwest Communications International Inc., told investors Tuesday the company recently has had to walk away from some deals because the numbers didn’t work out.

And while cable, telephone and Internet companies buying IP capacity, wholesale voice minutes and other communications services factor in price when selecting an underlying carrier, they – and their business customers – would have to be living on another planet to miss the telecom news headlines characterized by bankruptcy filings and scandals over the last year.

Global Crossing has taken a public-relations thrashing over the last several months in the wake of its bankruptcy filing, federal investigations concerning its accounting practices and widespread reports detailing the millions of dollars Chairman Gary Winnick and other executives pocketed through stock sales.

There are more than 70 lawsuits pending against Global Crossing’s former and current directors and officers, alleging violations of the federal securities laws and the Employee Retirement Income Security Act.

Still, Global Crossing owns one of the most extensive IP networks in the world spanning 100,000 route miles and reaching four continents, 27 countries and more than 200 major cities. And despite filing one of the largest bankruptcies in U.S. history, the company has managed to retain much of its recurring revenue, according to monthly operating statements filed with the bankruptcy court. Global Crossing reported $1.695 billion in recurring service revenue through the end of July. “In many cases we increased service levels and grew our business quarter over quarter,” MacCheyne said.

In its disclosure statement filed with the bankruptcy court, a document that is subject to change, Global Crossing projects that it will stop bleeding losses next year. The company anticipates positive EBITDA (earnings before interest, taxes, depreciation and amortization) and net income.

Service providers that do not own their own fiber and switches could help Global Crossing reach those milestones. Though many publicly held companies have either filed for Chapter 11 bankruptcy-court protection or closed shop altogether, many privately held companies remain on Global Crossing’s wholesale roster.

“There are a lot of switchless resellers out there that are selling UNE-P (the unbundled network element – platform) and 1+” making a good living, MacCheyne said. “These guys figure out those little niches to exploit and take advantage of. I would say a majority of our customer base is privately held.”

But Global Crossing can earn better margins selling its network services to corporations, such as multi-national companies, than leasing its pipes to resellers. “We are going to be pushing hard to leverage our network and our resources to tackle” multi-national corporations, MacCheyne said.