Allstream / AT&T Canada#
Allstream was the only competitive fiber platform that served nearly a dozen metropolitan areas stretching from Vancouver through Calgary, Edmonton, Toronto, Quebec City, and Montreal to Halifax in a pan-Canadian network. The company was formed from a combination of two businesses—Unitel Communications and Metronet Communications.
Unitel began in 1967 as CNCP Telecommunications, a joint venture of two of Canada’s telegraph companies, one owned by Canadian National Railway and the other Canadian Pacific Railway. Telegraph was already dying fast, and in the late 1980s, as telecom boomed, Canadian Pacific acquired 48 percent ownership of the business, while the cable TV/media giant Rogers Communications took a 30 percent stake. By 1990, Rogers had taken over the business entirely and rebranded it as Unitel Communications.
AT&T entered Canada in 1993 by acquiring a 20 percent stake in Unitel in exchange for US$31 million in cash and equipment valued at US$117 million. Over the next two years, Unitel struggled, leading Rogers to pass on exercising its right to acquire Canadian Pacific’s 48 percent. Within a year, AT&T increased its ownership to 23 percent, the maximum then allowed under Canada’s foreign ownership restrictions. The remaining two-thirds ownership shifted to three Canadian banks as an alternative to bankruptcy. Though AT&T’s ownership remained capped at 33 percent, it gained management control of the entity.
However, this restriction was expected to be lifted within a few years in the early 2000s. In the late 1990s, Unitel was rebranded as AT&T Canada. Recall that AT&T CEO Michael Armstrong was undertaking an aggressive makeover of AT&T during the Bandwidth Boom. His quest for restoring AT&T’s glory included AT&T’s ambitious global Concert joint venture with British Telecom. Armstrong envisioned the Canadian portion of this global venture would be AT&T Canada.
Armstrong’s ambition led him to broker a 1999 merger of AT&T Canada into the publicly traded MetroNet, with the resulting public entity assuming the AT&T Canada name. MetroNet was founded in 1995 in Calgary, with aspirations of being among the first local competitors to Bell Canada. In 1997 MetroNet went public and hired Brooks Fiber veteran D. Craig Young to be CEO, and his Brooks Fiber colleague and MFS veteran Mark Senda joined him as COO. In 1998 MetroNet acquired a national fiber network for US$131 million and purchased Rogers Telecom for US$690 million from Rogers Communications. These acquisitions positioned MetroNet as the largest competitor to Bell Canada.
AT&T Canada premerger shareholders would own 31 percent of the combined company, while MetroNet shareholders would own the remaining 69 percent. The transaction implied a Market Value of AT&T Canada of US$2.4 billion. In the complex transaction, AT&T would have the right to buy the shares held by MetroNet shareholders, expecting to exercise this right upon the lifting of foreign ownership restrictions that was expected to occur in the early 2000s.
During the meltdown, AT&T faced a multibillion-dollar obligation to fulfill its agreement with Unitel and buy the remainder. AT&T backed out, which sent AT&T Canada into bankruptcy. When AT&T Canada emerged from bankruptcy in 2003, it was rebranded as Allstream. AT&T sold its remaining interests in the Canadian company in 2004, writing off most of its investment.
In 2004 Manitoba Telecom, the incumbent telephone company that served the Manitoba province of Canada, acquired Allstream for US$1.3 billion. Mike Strople joined the company, now rebranded as MTS Allstream, in 2005 and eventually was named CEO.
“By 2011 it was clear that the Allstream business didn’t fit with MTS, which led to a formal split of the businesses,” Strople reflected when I shared with him a draft of Bandwidth. His mandate was to sell Allstream.
In 2013 Allstream entered an agreement to sell itself for US$520 million to Accelero Capital, which was a vehicle of the Egyptian tycoon Naguib Sawiris. Canada blocked the sale over concerns for national security. This left the company fluttering in the wind; Allstream was damaged goods.
“The unwinding of the Accelero purchase didn’t feel good at the time, but that wasn’t all bad. Allstream was consuming cash. MTS’s CEO, not knowing what to do with the business and with zero clarity on who he could sell it to, gave me the freedom to turn it around. We made changes. In 2014 we were cash positive for the first time since the 1990s,” Strople explained.
In 2015 Zayo purchased Allstream for $348 million, a bargain profitability multiple of only five times. Zayo remains the only fiber provider with a significant network across the US and Canada, leveraging its nine-thousand-mile network that serves all of Canada’s major markets.
“The sale of Allstream to Zayo oddly made everybody happy. MTS was relieved to complete the sale, even at this reduced price; Zayo got a bargain,” Strople added, emphasizing that the cash Zayo generated from Allstream in its first three years of ownership exceeded the purchase price.
“I expected the Allstream sale would be the end of my story. Instead I stayed at Zayo, which was probably the best part of the whole Allstream story for me,” said Strople.
Strople became a valued partner to me, remaining at Zayo through our 2020 exit. He left in 2024 to become CEO of telMAX, a fast-growing Internet provider in Canada.
Enron Broadband and Dynegy Global Communications#
In 1998, as the Bandwidth Boom Gold Rush was picking up steam, Enron disclosed plans to build a national fiber network to offer Bandwidth services. Enron announced partnerships with Touch America (then still named Montana Power) and WilTel 2 to build 1,600 miles of fiber in the Western United States. Enron’s Oregon power company, Portland General, would contribute right-of-way for this joint build. Enron also announced plans to use its utility right-of-way to develop routes between Salt Lake City and Houston and between Houston and Miami. From there, swaps would be used to gain access to the Northeast and Midwest.
In early 1999 Enron announced it would partner with CapRock to build a one-thousand-mile Texas network connecting Amarillo, Dallas /Fort Worth, Waco, Austin, San Antonio, and Houston.
In 2000 Enron unveiled plans to pioneer the commodity trading of Bandwidth. In Fortune magazine’s article titled “Enron Takes Its Pipeline to the Net,” Enron president Jeffrey “Jeff” Skilling explained that the “Internet really isn’t a network at all. . . . It actually comprises a bunch of separate networks.” Enron viewed this as a complexity that would hinder the development of video and other Internet services. Enron would rescue the burgeoning Bandwidth industry by creating a system that would enable Bandwidth trading. “Like a market maker on Wall Street, Enron will buy up pipeline space from other networks, maintaining an inventory that it can then mark up and sell to customers as needed,” reported Fortune.
This was a telltale case of a solution looking for a problem. Fortune quoted Enron CEO Kenneth “Ken” Lay proclaiming, “I think we could become the preferred platform for e-commerce around the world.” Fortune added, “If any old-world company could thrive in the Internet era, it’s [Enron].”
The initiative was branded the Enron Intelligent Network.
Analysts applauded Enron, with one comparing them to the Great Bambino. “For Enron to say we can do Bandwidth trading is like Babe Ruth’s saying, ‘I can hit that pitcher,’” said Steven Parla, an energy securities analyst at Credit Suisse First Boston. “You tell him to get up there and take three swings. The risk is staggeringly low, and the potential reward is staggeringly high.”
Wall Street was enamored, as the Washington Post reported in its January 2002 article titled “Broadband Strategy Got Enron in Trouble”: “Asking few questions, investors sped to buy the stock. . . . Enron shares shot up from $40 in January to more than $70 in less than two months and went as high as $90 that summer.”
WorldCom’s John Sidgmore didn’t get it. “Honestly, what possible expertise could Enron have to help in the communications industry? They have zero experience that I know of.”
Enron executives began acting as though they agreed with Sidgmore’s assessment. The Washington Post reported, “The stock price gains created a windfall for Enron executives and directors, who sold $924 million of company stock in 2000 and 2001. Kenneth D. Rice, who ran Enron Broadband Services, sold more than 1 million Enron shares for a total of $70 million in 2000 and the first half of 2001, according to regulatory and court filings. He left the company in August.”
In May 2002 the Wall Street Journal published “Watson, Who Long Led Dynegy in Enron’s Shadow, Steps Down.”
Almost from the time he helped found what became Dynegy in 1985, Chuck Watson worked in the shadow of a better-known company not far from him in Houston: Enron Corp.
When Enron began ramping up its electricity trading in 1994, Dynegy followed with similar trades in 1995. After Enron took over an electric utility in 1997, Dynegy bought one two years later. When Enron launched an Internet-based commodities-trading platform in 1999, Dynegy was out with its own within months.
And when Enron went into trading of capacity on high-speed broadband data lines, Dynegy again was right behind.
Dynegy, like Enron, was headquartered in Houston, Texas. Through a series of acquisitions, CEO Charles “Chuck” Watson grew Dynegy from a tiny regional energy company to a Fortune 500 enterprise.
Between 1999 and 2001, Dynegy’s revenue grew from $15 billion to $42 billion. Forbes reflected on this burst in its May 2002 article titled “All the Reasons Chuck Watson Did Not Resign.”
This Enronesque pace would seem impossible from asset-based activities. This growth did not happen by accident. It certainly seems to have had something to do with Dynegy’s share price rising from just under $9 to over $57 between April 1999 and April 2001. But the story behind the revenue growth has never been fully told.
Watson . . . said, “Don’t assume that financial complexity is wrong, evil or unnecessary. Our business is extraordinarily intricate and we must employ unique and sophisticated financial arrangements to fulfill our dual responsibility to deliver energy safely and manage financial risk.”
Watson left out the part about the fraud, which led to prison time for members of his accounting team.
Like Enron’s management team, Watson saw an opportunity to use the Bandwidth Boom to bolster Dynegy’s financial performance. Dynegy Global Communications was formed in 2000 when Dynegy acquired 80 percent of Colorado-based Extant for $152 million. Extant was founded by Larry McLernon, who previously founded LCI International, which was acquired by Qwest. Extant, it seemed, was McLernon’s attempt to remain relevant. It leased fiber from Level 3 and others to connect twenty-eight cities as part of an ambitious plan to reach more than one hundred cities by the end of 2003.
Dynegy was following its rival, Enron, off a cliff. “This is not a small strategic step, it is a huge strategic step with a relatively small investment—less than 10 percent of [Dynegy’s] capital budget over the next few years,” declared Watson as he announced Dynegy would spend $400 million to complete Extant’s network.
Soon thereafter, in September 2000, Dynegy’s stock hit $59 a share—its high-water mark.
Later in 2000, Dynegy jumped into the Europe Bandwidth market by acquiring London-based iaxis for $200 million. iaxis operated an 8,750-mile Bandwidth network that connected forty data center facilities across France, Germany, Italy, Spain, and the UK.
“This acquisition firmly establishes the platform for the expansion of Dynegy’s network connectivity and broadband communications strategy into Europe and is an ideal complement to Dynegy’s existing US operations,” Watson touted. “For a cost of less than $200 million, Dynegy will have a significant presence in the European communications marketplace.”
Dynegy doubled down in 2001 by partnering with another Colorado upstart, Telseon, to jointly build out networks in eighteen of the largest US markets. Dynegy committed $75 million and planned to combine Telseon’s metro fiber with the intercity fiber associated with the Extant acquisition. John Kane, ICG’s first CEO, was now Telseon’s chief.
Pat Marburger, the president of Dynegy Broadband Trading and Origination, explained, “It’s literally like taking a freeway with no off-ramps and adding a bunch of off-ramps, so traffic can flow into multiple locations. It gives us much greater reach into most major markets in the US.” Dynegy positioned that they shaved twelve to eighteen months off their schedule and cut their capital outlay in half.
Watson believed his approach to the Bandwidth opportunity was more clever than that of his energy counterparts at Williams Companies and Enron Broadband. “To build fiber like Williams and Enron is extremely capital intensive. For them it’s an asset play. We believe it’s an intellectual play. We call what we’re doing smart-build,” said Watson. Like Enron, Watson planned to apply Dynegy’s experience in energy commodities trading to Bandwidth.
In reality, Dynegy was buying struggling businesses that leased facilities from other carriers with hopes to resell commoditized Bandwidth in an increasingly overcrowded market.
Scott Yeager, Enron Broadband’s senior vice president of strategic broadband and a former MFS colleague, led an Enron delegation to Level 3’s Boulder headquarters. He described the Enron Intelligent Network and its Bandwidth trading ambitions. We were skeptical. When we persisted in asking questions about Bandwidth futures exchange, Bandwidth swaps, and accounting treatment, they would look at each other and say, “They just don’t get it.” I recall wondering what I was missing. Their “Smartest Guys in the Room” tagline, which is the title of a fantastic book on the broader Enron debacle, was well earned.
Later, I visited Yeager at their headquarters in Houston, expecting him to introduce us to Enron’s COO, Jeff Skilling, and CFO, Andrew S. Fastow. Showing signs of anxiety, Yeager left the room to fetch them only to return a half hour later saying they were busy. Before long, it became clear what was occupying their time.
The year 2001 was not a good one for Enron. In August Jeff Skilling quit, with Chairman Ken Lay assuming the CEO title. Enron reported a big third-quarter loss. In October the SEC opened a formal investigation, with reports that Enron executives were enriched through undisclosed partnerships being part of the probe. Andrew Fastow was replaced. Enron reduced previously reported earnings. In November Dynegy signed a letter of intent to rescue Enron through a merger that would value Enron at $8 billion. Dynegy advanced $1.5 billion to Enron, which was backed by Enron’s oil pipeline assets. Just three weeks later, as the full magnitude of Enron’s situation became increasingly clear, Dynegy pulled out of the intended merger. Just ten days before Dynegy’s pull out was made public, Lay’s wife, Linda, sold 500,000 Enron shares owned by their foundation. On December 2, with its stock trading well below $1 per share, Enron filed for bankruptcy.
In January 2002 the Forbes article titled “Shell Game” described the elaborate partnerships Enron used to mask its financial performance, while Lay and Skilling sold millions of dollars’ worth of shares. Forbes cited an accounting professor describing the scheme. “It’s like somebody sat down with the rules and said, ‘How can we get around them? They structured these things to comply with the letter of the law but totally violated the spirit.”
Enron’s Bandwidth trading junket played a major role in Enron’s deception. Forbes elaborated,
In June 2000, for example, Enron sold $100 million worth of [Dark Fiber]. The “buyer” was a partnership run by Fastow called LJM2 (the acronym reportedly comes from the initials of his wife and children), set up in 1999 to trade assets with Enron. On that deal, Enron booked a $67 million profit, a significant piece of the $318 million gross profit the company reported for the broadband business in 2000. LJM2 later sold $40 million of the Dark Fiber to what Enron refers to as “industry participants,” and the remainder to another Enron-related partnership for $113 million in December. What’s curious is that the value of the fiber ostensibly increased 53% between June and December—during the same time that, in open markets at least, the value of Dark Fiber plunged by 67%. LJM2 reaped a $2.4 million profit from the fiber trade, contributing to the $30 million of undisclosed gains the LJM partnerships delivered to Fastow.”
An analyst told the Washington Post, “[Enron executives] were great spin doctors. They had the answers. The answers were lies.”
Insiders also knew it was a fraud. “From a common-sense standpoint, we knew it was smoke and mirrors,” a former Enron Bandwidth trader told the Washington Post. A Global Crossing participant called it “the Houston poker game.”
Enron and Qwest used the swap game to help each other hit financial targets. In early 2002 the New York Times reported the two companies “raced to complete the transaction as the third quarter was ending in September. Enron and Qwest valued the transaction at more than $500 million.” Executives close to the deal told the New York Times that “the swap helped Qwest soften a deteriorating situation in profit and revenue at the end of last year’s third quarter. The deal also allowed Enron . . . to avoid recording a huge loss by selling an asset whose value had plummeted on the open market.” A former Enron executive said Qwest’s pitch was “We will overpay for the assets, and you will overpay me on the contract.”
Multiple executives from Enron Broadband Services, including my former colleague Scott Yeager, were indicted on charges of conspiracy, fraud, insider trading, and money laundering. NBC News reported testimony from the 2005 trial about the software that Enron touted as enabling Bandwidth trading: “‘It was referred to as the secret sauce or pixie dust,’ former director of product engineering Shawna Meyer told jurors. . . . ‘Sprinkle it around or add some secret sauce to the network and it would solve all the problems that we had.’”
On July 7, 2004, Lay was indicted on eleven counts of securities fraud, wire fraud, and making false and misleading statements. The trial commenced in early 2006. In May the jury found Lay guilty on six counts of conspiracy and fraud. While awaiting sentencing, Lay died from a heart attack while at his home in Aspen, Colorado.
Skilling was convicted of federal felony charges and was found guilty of conspiracy, insider trading, making false statements, and securities fraud. He was sentenced to twenty-four years in prison and fined $45 million. He served twelve after multiple appeals resulted in a reduced sentence of fourteen years.
CFO Fastow was sentenced to a six-year prison sentence and spent five years behind bars. His wife, Lea Weingarten, who worked at Enron and participated in the fraud, was sentenced to twelve months.
Yeager from Enron was acquitted on six fraud counts in an indictment that charged that to inflate the value of Enron’s stock, he deceived the public about the value of Enron’s project to develop a nationwide fiber communications system. The jury hung on the remaining insider trading and money laundering counts. The Supreme Court, in a 6–3 vote, issued a ruling that barred a retrial on these two remaining counts.
tw telecom purchased Enron’s fiber assets as part of a competitive auction in early 2004. The acquired 4,200-mile network served twenty-one states, with a concentration in Oregon.
A similar fate to Enron’s played out at Dynegy. By late 2001 Watson used Dynegy’s third-quarter earnings call to paint a rosy picture, declaring that the industry had touched bottom and demand would pick up. “The tragic events of September 11 means more video conferencing than before,” Watson predicted. He added, “There will be a permanent change in the way of doing business after what happened.”
Watson saw Enron’s late 2001 collapse as an opportunity. The Wall Street Journal explained,
Then when Enron began to crumble amid disclosures of accounting irregularities, Mr. Watson pounced, offering last November to buy out his longtime rival and mentor for about $9 billion. He soon dropped the takeover bid, though, and began stressing how different Dynegy was from Enron. His company was a sturdy alternative to Enron built upon hard assets, not accounting monkey-business, he said.
Well, Dynegy was not sturdy. In early 2002 the SEC launched an investigation of Dynegy’s energy trading activities and an off–balance-sheet entity—code-named Project Alpha—that was used to evade taxes. In May 2002 Dynegy’s board terminated Watson.
Strangely, the board characterized the departure as a “constructive termination” instead of a “for cause” firing. As such, Watson was paid $33 million in severance—far in excess of the $7 million he would have made had they retained him for the remaining eight months of his employment contract. Watson was already wealthy via a sale of $250 million of Dynegy stock in 2000.
Dynegy characterized Watson’s departure as a response to “an industry that is changing more rapidly and profoundly than ever before . . . new opportunities . . . new challenges [and] events of the past year have hurt the credibility of this sector and eroded investor confidence.”
Unlike with Enron, Dynegy’s Bandwidth excursion was not a factor in the SEC investigation. However, it did contribute to the financial duress. In June 2002 Dynegy disclosed an asset write-down of $450 million attributed to its Bandwidth dalliance.
Dynegy sold its European Bandwidth business in January 2003. “This is a strong first step in Dynegy’s strategic commitment to divest its investment in communications and focus on our core energy businesses,” said Dynegy CEO Bruce Williamson, Watson’s successor.
Three months later Dynegy sold the US Bandwidth business. “The completion of this transaction will end our participation in the communications sector, enabling us to focus entirely on the energy business.” At the time of the sale, Dynegy’s network served forty-four markets with sixteen thousand miles of fiber.
“[Dynegy] no longer has to pour money into it,” a Raymond James analyst told Midland Daily News. “You can sell anything, it’s the price that’s the question. I’ll be very interested to see what they got for it and if they were paid in cash.” My guess is they received very little for either the US or the European business. Dynegy was satisfied to just slam the door shut on its Bandwidth business.
On the day Dynegy announced its exit from Bandwidth, its share price closed at $2.49 a share, down 95 percent since its 2000 entry into the Bandwidth business.
Three Dynegy executives were indicted by the SEC for improperly boosting cash flow and reducing taxes. US attorney Michael Shelby cited Jamie Olis, Gene Shannon Foster, and Helen Christine Sharkey for “withholding the truth about Dynegy’s true fiscal condition from the SEC, shareholders and the public.” Olis, Foster, and Sharkey were members of Dynegy’s tax and risk management group.
The SEC determined that Dynegy used inappropriate accounting transactions to bolster cash flow by $300 million and cut taxes by $79 million. Dynegy paid the SEC $3 million to settle the investigation without admitting wrongdoing. Foster and Sharkey pleaded guilty and agreed to cooperate with the SEC investigators. Foster ended up with fifteen months behind bars, a $1,000 fine, and three years’ probation. Sharkey served thirty days in prison and was required to pay a $10,000 fine immediately. Olis was found guilty and received a twenty-four-year sentence, later resentenced to six years.
Watson, despite being CEO when the fraud led to a massive overstatement of financial performance, was never charged.
Lightower#
M/C Partners was focused on more than just Zayo. In 2007, the year of Zayo’s launch, M/C partnered with Wachovia Corporation to purchase the US subsidiary of the international power company National Grid for $290 million. The asset base was a 1,100-mile fiber network and 350 wireless towers in the Northeast. The new entity was named Lightower Fiber Networks.
In 2008 Lightower sold its tower assets to SBA. Lightower then made two acquisitions that put it on a pathway to be a meaningful rival to Zayo. They acquired DataNet Communications Group and KeySpan Communications. The fiber network tripled to 3,600 miles, including Boston, Albany, Manhattan, Long Island, New Jersey, and Connecticut. It featured unique fiber routes that connected transatlantic fiber landing stations to Manhattan.
John R. Galanti started Datanet Communications Group in 2000 with the backing of Quadrangle Capital Partners. In 2007 I talked to Galanti about Zayo acquiring his company. I should have been more aggressive. His price seemed high to me relative to the quality of assets and the geography. With the benefit of hindsight, the price was very reasonable, and the assets would have bolstered Zayo’s early collection of assets. I should have jumped on the opportunity, especially since Datanet provided a big boost to Lightower. I remember the deals I misplayed just as much as I recall my successful acquisitions.
In 2009 Rob Shanahan, the co-founder and former CEO of Conversent Communications, took over for Doug Wiest as Lightower’s CEO. Shanahan remained CEO for the last eight years of Lightower’s impressive journey.
Lightower continued its regional rollup strategy. In May 2010 the company purchased Veroxity Technology Partners, which added two thousand miles of fiber in Boston and Connecticut and a customer base that was nicely concentrated in the financial services vertical.
Next up in 2010 was Lexent Metro Connect, which added 200 buildings and 150 miles of fiber concentrated in the financial exchanges and data centers of New York City and New Jersey. Lexent featured low-latency routes between these financial trading locations. Ray La Chance, another one of our industry’s good guys and a true New Yorker, built Lexent over six years.
In early 2011 Lightower followed up with NSTAR Communications, which consisted of the fiber assets of the NSTAR energy conglomerate. Some 280 miles of fiber along with 225 buildings were added in the Boston metropolitan area.
In early 2011 Lightower perhaps had a more valuable set of assets than Zayo, as the revenue mix was more weighted on infrastructure, and the assets were concentrated in the uniquely important Northeast region. Perhaps Lightower instead of Zayo was destined to be a leader of the consolidation. We each had the opportunity to make a bold move—Sidera Networks was shopping itself to both of us. Shanahan took the bait.
The prior name of Sidera Networks was RCN Business Solutions, a subsidiary of the Cable TV company Residential Communications Networks Corporation (RCN). The backstory of RCN intersected with MFS.
When I joined MFS in the early 1990s, Kiewit was exploring a parallel venture to MFS. Before joining MFS, I participated in Ameritech’s study of the Cable TV industry. Kiewit’s analysis focused on leveraging MFS’s fiber assets to provide service to consumers. The result of this initiative was America’s first facilities-based provider (overbuilder) of bundled telephone, Cable TV, and Internet service. The leader of this initiative was David McCourt, who joined Kiewit when MFS purchased his Boston company—Corporate Communications Network—in the early 1990s.
McCourt began his career as a probation officer in Washington, DC, but shifted early on to launch a construction company named McCourt Cable Systems. Like Steve Garofalo of MFN, McCourt learned about fiber networks by designing and building networks for others, particularly Cable TV providers.
McCourt was a charismatic guy, but he rubbed a lot of people, including me, the wrong way. He came across as arrogant, only wanting to spend time with those whom he considered power brokers. Similar to a lot of the grand storytellers of the Bandwidth Boom, he focused far more on the boldness of the strategy than the execution details.
McCourt observed Crowe’s progress with MFS and made his case that Kiewit should sponsor him in a residential communications strategy. His vision was to offer a comprehensive set of communications services aimed at residential customers that included voice, Internet, and Cable TV services.
To execute his strategy, McCourt convinced Kiewit to back him in the acquisition of the public company C-TEC Corporation, which operated both phone and Cable TV properties in the Northeast. His plan was to use C-TEC as a platform to expand service into adjacent geographies using MFS fiber. After years of jiggering, he carved out RCN as the overbuilder competitor to both the telephone and Cable TV company. His strategy was aimed at densely populated areas along the Boston to Washington, DC, corridor, where he could target high-rise locations.
In 1996 RCN acquired Liberty Cable, a company providing television services to forty thousand subscribers in multitenant New York City buildings through wireless antennae. RCN’s thesis was to replace the antennae with fiber and offer the full set of communications services.
McCourt raised $1.7 billion in 2002 to fund a mosaic of other acquisitions that were at best loosely related to his strategy. To buy time during the meltdown, RCN generated $245 million by selling its original C-TEC New Jersey cable properties. However, McCourt couldn’t put off the inevitable.
In July 2004 RCN declared bankruptcy, and McCourt resigned as CEO. Level 3’s 21.6 percent ownership became worthless.
On December 31, 2004, RCN emerged from bankruptcy. A total of $1.2 billion in debt was converted to equity valued at approximately $700 million. Peter Aquino replaced McCourt as CEO.
A year later RCN created the subsidiary RCN Business Solutions, coinciding with its acquisition of Con Edison Communications from the power utility Consolidated Edison. This bolstered its fiber network in New York City. The following year, 2007, RCN acquired NEON Communications, a 4,800-mile regional intercity network that connected data centers and carrier hotels from Maine to Virginia. Another name change followed, this time to RCN Metro Optical Networks.
ABRY Partners, a Private Equity firm in Boston, had close relationships with Zayo’s investors Charlesbank and M/C. They proposed that ABRY sponsor Zayo’s acquisition of RCN, combining RCN Metro Optical Networks and selling off the core RCN Cable TV business. Though intriguing to me, I was concerned with the complexity of the transaction. ABRY decided to proceed on its own.
In 2010 ABRY acquired RCN for $1.2 billion. They rebranded RCN Metro Optical Networks as Sidera Networks and separated it from RCN.
Later that year, Sidera made two acquisitions that reinforced its transition to a Bandwidth Infrastructure provider. They acquired Cross Connect Solutions in Philadelphia and Long Island Fiber Exchange.
I continued to converse with ABRY about merging Sidera into Zayo, but I did not have the conviction to proceed forward. Sidera had interesting assets in the valued Northeast corridor, but much of its network was intertwined with the Cable TV network of RCN. Its revenue base included a high proportion of smaller enterprise customers.
In December 2012 Sidera announced a merger into Lightower. ABRY remained an investor. Berkshire Partners, another Boston investment firm, became a new investor in the combined company. A $2 billion value was placed on the combination of Lightower and Sidera.
Berkshire was also a firm that knew Zayo well. Whenever I visited Boston, I would bounce between M/C, Charlesbank, ABRY, and Berkshire. As with ABRY, we didn’t find a way to bring Berkshire on as an investor despite our mutual interest.
Lightower’s final acquisition was Fibertech. Stephen Garofalo of MFN created the Dark Fiber product. However, John Purcell, the CEO of Fibertech, showcased how to navigate the Dark Fiber business model to create enormous stakeholder value.
Fibertech’s origin story starts with Rochester Telephone Corporation, which was founded in 1920 as a merger of Rochester Telephonic Exchange and Rochester Telephone Company. In 1995 the company listed on the NYSE and rebranded itself as Frontier Corporation. Global Crossing bought Frontier in 1999 and sold it to Citizens Utilities Company in 2001. Citizens changed its name to Frontier Communications.
Purcell joined Rochester Telephone in 1965 after graduating from Le Moyne College. He remained there for over thirty years, slowly working his way to lead Frontier’s regulatory group as vice president during the period of rapid deregulation. Purcell became vital to Frontier’s open market plan, which was the first time a telephone company sought to introduce competition in the local telephone market.
Frontier was a good environment for developing entrepreneurial talent in the otherwise stale telecom industry. Many of its executives led competitive fiber companies, including Rob Shanahan of Lightower, David Rusin of AFS, and Arunas Chesonis of PaeTec.
In 2000 Purcell left Frontier to team up with his Rochester Tel colleague, Frank Chiaino, and launch Fibertech. Their simple strategy was to be the underlying Dark Fiber infrastructure for voice, Internet, and managed service providers.
As part of the commercial transactions, Fibertech’s customers funded much of the capital expenditures to build out the networks. Fibertech, in turn, provided Dark Fiber to the customers, so they didn’t need to buy optronics. Not much outside capital was needed from investors. Fibertech’s profitability margins were an extraordinarily high 75 percent. A handful of sales professionals, product managers, fiber engineers, and network operators were all that was needed. The financial and operational systems were simple. After all, it takes little effort to send out invoices to a few dozen customers that leased fiber under fixed-rate, long-term contracts. Revenue and customer churn was nonexistent because Fibertech’s customers needed the fiber to survive.
Unlike almost every other fiber company launched in 2000, Fibertech was unaffected by the meltdown. Purcell and Chiaino steadily built their Dark Fiber business. They sold it to Lightower in 2015 for $1.9 billion. Though I loved FiberTech’s business model, the $1.9 billion price tag was steep for me, especially considering the lower-tier markets that FiberTech served. But it turned out to be a good acquisition for Lightower.
Bolstered by the 2015 acquisition of Fibertech, Shanahan and his investors were ready for their well-deserved payday. Crown Castle was destined to be their exit; Lightower was the largest Bandwidth pure play and fit neatly into Crown’s strategy. However, I wasn’t going to make it easy on Crown. I battled Crown all the way to the finish line, topping its $6.9 billion bid with a $7.1 billion Hail Mary. They matched my bid and completed the purchase.
Shanahan and the Lightower team produced an exceptional outcome for their investors. Rob, you were a worthy and friendly rival. Well done.
McLeodUSA#
Clark McLeod was a junior high math teacher in 1970s Cedar Rapids, Iowa, when MCI won a landmark legal battle with AT&T. The ruling opened the floodgates to competition for long-distance voice traffic, and McLeod made an unexpected career pivot. In 1981 he formed TeleconnectUSA to compete with AT&T. Renamed TelecomUSA, the company grew to be the fourth-largest, long-distance provider, and McLeod sold it in 1990 to MCI for $1.25 billion.
Earning $50 million from the sale, McLeod turned to philanthropy. But he later told Forbes he had surmised he “was better at creating jobs for people than giving money away.” And so McLeod jumped back into the game, launching McLeodUSA, with an aspiration to compete against the Baby Bells. “The 1980s were ‘a bake sale’ compared to now,” McLeod said to Forbes. He added, “There are more disruptive trends going on than in any other business.”
McLeod emphasized that his strategic focus would be plain old telephone service, “POTS” in old Bell System jargon. “The other [local competitors] didn’t identify the opportunity; they all looked at the Internet. Is the Internet controlled by a monopoly? Hell no, there are thousands of providers. What is the protected monopoly? Local services.”
In describing his superregional strategy to the Wall Street Journal, McLeod explained, “There’s a real market to serve customers in the second-and-third-tier markets on a regional basis. . . . Nobody else in the country is doing this. The bigger phone companies are either too focused on merging or on going international.”
In 1996 McLeodUSA raised $240 million in a Nasdaq IPO priced at $20 per share.Adjusting for a stock split that occurred a few years later, the IPO stock price was $3.33 per share. Salomon Smith Barney executed the IPO. As expected, Salomon analyst Jack Grubman launched coverage with a buy recommendation and a twelve-month price target of $40. “McLeod represents one of the truly great business models that will be executed in the new era of telecom. [McLeodUSA will be] one of the best return vehicles in what will be a high-return segment of the telecom industry.”
In 1997 McLeodUSA acquired Consolidated Communications, a one-hundred-year-old rural phone company based in Mattoon, Illinois. CEO Richard Lumpkin was the great-grandson of the founder, Iverson A. Lumpkin, and the fourth Lumpkin to run the company. The $400 million price tag consisted of $155 million in cash, $60 million in assumed debt, and 8.5 million shares of McLeodUSA stock, then valued at $24.50 per share.
“These are markets McLeodUSA itself would have likely entered, thus a potential competitor has been eliminated,” Grubman wrote when praising the acquisition. In the same year, McLeodUSA formed an alliance with AT&T to offer local phone service to business customers in thirty markets. The stock rose to $35.75.
In 1999 McLeodUSA purchased Ovation Communications for $500 million, which provided services in Milwaukee. McLeod once again offered a mix of cash ($141 million), assumed debt ($83 million), and stock (5.1 million shares). Ovation’s CEO, Tim Devine, a former MFS colleague of mine, said, “We have carved out a niche as a super-regional [local phone firm] in the Midwest.”
The Ovation acquisition included Phone Michigan,Ovation acquired BRE Communications, which did business as Phone Michigan. which operated in Flint, Michigan. Additionally, McLeodUSA funded the ongoing three-hundred-mile expansion into Detroit.
Later in 1999 McLeodUSA bought Access Communications, which served Arizona, Boise, Las Vegas, New Mexico, Oregon, Salt Lake City, and Washington State. The $250 million price consisted of $50 million in cash, $97 million in assumed debt, and 1.9 million shares valued at $101 million. At this point McLeod’s stock had reached $53 per share.
McLeodUSA caught the attention of Teddy Forstmann of the famed leveraged buyout firm Forstmann Little & Co. McLeod told the Washington Post in 2002,
[Teddy] looked me in the eye and said, “How much funding do you need to execute on your existing plan?”
“A billion dollars,” McLeod answered.
“That’s what we want to put into the company,” Forstmann said, and it was done.
In 1999 Forstmann Little invested $1 billion for a 12 percent stake, which implied a value of over $10 billion, including debt. The price per share was $36.50, a 15 percent premium to McLeodUSA’s most recent stock price. As the twenty-first century was about to begin, McLeod, the erstwhile junior high math teacher, was armed and dangerous and ready to go national.
In January 2000 McLeodUSA acquired Splitrock for $2.1 billion. This gigantic purchase price for a company with little revenue and few customers was curious, especially since Clark McLeod was on the board. Roy Wilkens, the former CEO of WilTel, was also a Splitrock board member. He joined McLeodUSA’s executive team to lead the newly created data services business unit.
Later in 2000, McLeodUSA purchased CapRock for $535 million, adding a 5,200-mile fiber network in the Southeast, along with a strategic relationship with AT&T, to its platform.
McLeod wasn’t alarmed by the growing tension in the Bandwidth markets. In fact, he welcomed it as an opportunity. In January 2001, when most telecom providers were shut out of the markets, McLeod raised $750 million in high-yield debt. “McLeod has seen this mess before: Wall Street loves telecom deregulation, so it throws billions at bad businesses. A bloodbath ensues. The survivors remake their markets. And he gets rich,” explained Forbes in its March 2001 article titled “Conqueror in the Carnage.”
Despite the bravado, McLeodUSA couldn’t escape the quicksand. In May 2001 McLeodUSA lowered its revenue guidance by $100 million. Its stock price, which was already down sharply from its 2000 high, fell 31 percent to $6.77. McLeod announced it was abandoning its national strategy and returning to its focus on its thirty-one-thousand-mile fiber network that served twenty-five states.
In July McLeodUSA drew $175 million of its secured debt facility.
By August 2001 McLeodUSA’s stock traded below $3 a share, down 90 percent from the $53 price at the time of the Splitrock acquisition. Salomon’s Grubman explained that the company “had some missteps in the last year and a half, most notably the ill-advised acquisition of Splitrock.” He sidestepped his own glowing praise for the deal when it had been announced and that Salomon had advised McLeodUSA in support of the $2.1 billion price.
Forstmann Little invested an additional $100 million in August to stabilize the company. Forstmann also agreed to forgo $175 million of dividends, over five years, due to it from its year 2000 $1.0 billion investment. Steve Gray was named CEO, with Clark McLeod retaining only his chairman position. Teddy Forstmann became a member of McLeodUSA board’s executive committee.
“Wall Street is all about greed and fear,” Forstmann explained to the New York Times. He added, “These guys were taken on the greed ride and then on the fear ride. We’re now going on the reality ride. This will either make me look very smart or very dumb.” Dumb turned out to be the answer.
In October an additional $200 million of the secured debt was drawn. McLeodUSA drew $175 million of its secured debt facility, leaving $342 million available under its $1.3 billion facility.
The stock continued its free fall, dropping below $1 a year by November. McLeodUSA wrote off $2.5 billion, attributing most of it to the Splitrock acquisition.
In November 2002 the Washington Post published “A CEO’s Lesson: What Goes Up . . .”
Before their money vanished with their faith, Clark E. McLeod’s investors could sometimes find him just by glancing skyward. It was spectacular to stand there on the edge of a cornfield, crane the neck and look up at his cream-colored jet hurtling by. A state-of-the-art Gulfstream G-5, with sleeper cabins and a flight attendant, glinted in the sun, the $39.5 million chariot of a CEO who had joined the ranks of American technology demigods.
A snapshot of an epoch: the great American ride, not long before the crash.
“He’s up there,” someone would say, and there would come gruff murmurs of awe from men seldom amazed by anything.
A self-made billionaire who had risen from hard days when he puttered around in a sputtering Volkswagen, McLeod seemed above them, somehow, and this they didn’t mind—in the way lucky people seldom resent a man they regard as a benefactor. McLeod’s luck seemed to float down to his hometown, so even when he exercised stock options to the tune of about $98 million in February 2000, who could begrudge him when middle-income investors in his company, McLeodUSA and other telecoms sometimes made $50,000 in a day, and riches seemed to be their reward for simply believing? And he was one of their own, after all, a former schoolteacher who grew up just three miles away in the town of Marion, in the middle-class home of his educator parents.
Speed and ascent, ambition and acquisition: They were the paramount ethics during the 1990s in technology and telecommunications, where a titan’s climb seemed limitless and his fall improbable, where no one had forecast the spiral coming. Up in the pantheon of American chief executives, McLeod pushed hard, and harder still—too fast, as he later acknowledged—and on borrowed wings at that, far beyond a safe and rational point.
The Washington Post described the life that McLeod created for himself.
At Clearwater Farm, where McLeod and his wife, Mary, raised thoroughbred dressage horses, cars stopped and dreamers furtively spilled out to stare, able to see the horses roaming in meadows near McLeod’s recently built equestrian arena, with exotic Teflon-coated, dust-free gravel.
Inside, his friends reported with awe, a mirror nearly the length of a football field offered a rider a flattering view of himself atop his steed.
Those not fortunate enough to be among his official visitors queued up nearby to glimpse slivers of his house. It sat behind white pines and evergreens he had ordered uprooted and trucked in from out of state, only heightening the sense of a great man’s removal. Tucked out of sight were man-made ponds he had stocked with bass and koi, near a 20-foot waterfall.
He lived like Gatsby.
In 2000 McLeod self-published a book called This Way Up. The Washington Post pointed out the hypocrisy.
Integrity was high on his list, he wrote, but it was also the value that people “fail at most.” He pledged to lead the way to success.
“Integrity is doing what’s right. Always. . . . Integrity requires saying what needs to be said, when it needs to be said, even when it’s not easy to say it.”
The (shareholder) lawsuits charged that McLeod had not said what needed to be said when it was not easy to say it—that he had failed to be candid when the company began careening, and that when he did speak, he and others materially misrepresented the company’s ills.
In December McLeodUSA sold the wholesale dial-up access business to Level 3 for $55 million and associated liabilities. This was Splitrock’s primary revenue stream, which was associated with the access services provided to Prodigy.
Also in December, McLeodUSA warned it might file for Chapter 11. A prepackaged restructuring was agreed to with Forstmann Little. The plan involved McLeodUSA selling its directory publishing business, with Forstmann Little agreeing, if no alternative buyer emerged, to acquire the business for $535 million. Yell Group of Britain stepped up and bought the business for $600 million.
The proceeds were used to buy back the $2.9 billion of bond debt for $670 million cash and 15 percent of McLeodUSA post-recapitalization stock. The $140 million revolving credit line and the $1.3 billion in bank debt would be reduced by a few hundred million dollars with proceeds from asset sales.
Forstmann Little invested an additional $175 million, and it also agreed to convert its $1 billion existing preferred stock into common stock. After restructuring, Forstmann Little owned 58 percent of McLeodUSA and a total of 30 percent of the restructured stock would be granted to the public shareholders. In April 2002 McLeodUSA emerged from bankruptcy and returned to Nasdaq.
Forstmann explained his logic in a note to his investors: “By eliminating all this excessive debt and getting to an appropriate capital structure, we believe that the value of this company can be improved to the point that will at least allow us to get even on our total investment.” Well, that isn’t how the game played out.
Before its sale to McLeodUSA in 1997, Consolidated Communications had been in the Lumpkin family for one hundred years, with four generations of Lumpkins serving as the CEOs. In July 2002 Richard Lumpkin, the fourth CEO, repurchased Consolidated with the backing of Spectrum Equity Investors and Providence Equity. Lumpkin paid $271 million for the asset he sold five years earlier for $400 million, basically equivalent to being paid $130 million to take a five-year sabbatical. Great-granddad would have been proud.
McLeodUSA used the proceeds from the Consolidated sale to reduce its bank debt from $960 million to $715 million.
In the late 1980s, Ted Forstmann’s golf partner asked him what it meant to be taken over by a buyout firm. “It means the barbarians are at the gates” was Forstmann’s memorable reply.
Barbarians at the Gates: The Fall of RJR Nabisco, written by Bryan Burrough and John Helyar in 1989 and considered one of the best business books ever, featured Forstmann of Forstmann Little battling Henry Kravis of KKR for control of the tobacco and food conglomerate that owned Camel, Newport, Oreos, and Fig Newtons. KKR prevailed.
Forstmann founded Forstmann Little in 1978. Before his dallies in Bandwidth, Forstmann earned a whopping 58 percent compounded annual return on investment. The firm’s most successful investment was Gulfstream Aerospace, which Forstmann acquired in 1990 for $800 million. Forstmann appointed himself chairman and CEO and, over his seven-year reign, turned Gulfstream into one of the most successful jet manufacturers. In 1999 he sold Gulfstream to General Dynamics for $5.6 billion, earning more than $5 billion in return for the firm’s investors and public shareholders.
Chris A. Davis was on Forstmann Little’s Gulfstream turnaround team, where she was CFO and a board member. In August 2001 she joined McLeodUSA’s newly created turnaround team—code named Gulfstream II. In April 2002 she was named chairman and CEO, replacing McLeod and Gray. Akin to The Who’s 1989 “The Kids Are Alright” reunion tour, Forstmann’s band was back together and ready to rock.
One year later Davis put a positive spin on McLeod’s restructuring: “We’ve done a lot of refocusing and rebuilding of the company and significantly improved the balance sheet.” However, the top and bottom-line financial performance of the business continued to struggle.
Two years passed and the financial challenges continued. In the second quarter of 2005, McLeodUSA reported $160 million in revenue, which was down from $192 million from the same quarter of 2004. McLeod reported a gigantic loss of $268 million for the quarter. The stock price, which traded below $1 for the previous twelve months, was down to $0.02 a share, causing a delisting from Nasdaq. McLeodUSA warned of a second bankruptcy. McLeodUSA also disclosed it had been trying to sell itself off but found no buyers.
In August Davis resigned as CEO. McLeodUSA hired Alvarez and Marsal, and Alvarez put a chief restructuring officer in charge. In October 2005, three years after the first bankruptcy, McLeodUSA filed a petition for its second bankruptcy.
Forstmann’s $1.175 billion investment was worthless.
In January 2006 McLeodUSA emerged from bankruptcy. Its $677 million of debt was reduced to $73 million, and with $23 million of cash on its balance sheet, its net debt was now $50 million. Secured junior bank debt was converted into equity of the restructured entity.
Royce Holland, the former COO of MFS and, more recently, the former CEO of Allegiance Telecom, was named the new CEO. “We will be focused on small and medium sized business customers, particularly those that have a footprint matching our 25-state network.”
In March 2007, one year later, McLeodUSA filed to take the company public on Nasdaq with plans to sell $172.5 million in common stock. Instead, McLeodUSA agreed to sell to PAETEC Holding for $492 million, plus the assumption of $65 million of debt. PAETEC was sold to Windstream in 2011 for $2.3 billion. In 2019 Windstream filed for Chapter 11 bankruptcy.
Holland presumably had at least 5 percent of the equity, which means he made more than $25 million for this two-year effort. Nice job, Royce!
McLeodUSA and its executives were involved in several lawsuits and investigations.
McLeod agreed to pay $4.4 million to settle a New York lawsuit associated with spinning. The judge called the practice “a sophisticated form of bribery.” The practice of spinning, which involved numerous Bandwidth executives, involved bankers allocating shares of hot IPOs to executives as a reward for using their banking services.
McLeodUSA consented to an SEC cease and desist order regarding the misrepresentation of Bandwidth swap transactions. Revenue and EBITDA were overstated by $11.2 million and $7.1 million, respectively, in 2001, which had the effect of portraying the company as growing rapidly when, in fact, it was in decline. The company made accounting errors in the recording of the transactions in its financial statements. Additionally, management was not transparent on the positive yet unstainable lift that the swaps gave to McLeodUSA’s financial performance.
The state of Connecticut, which was an investor in Forstmann Little, sued Forstmann Little for making reckless investments. “I have no intention of sitting on the sidelines while any money manager takes Connecticut’s pension funds and places them in jeopardy,” said the state’s treasurer. “Forstmann’s actions raise serious concerns regarding both their motives and the professional conduct that is expected of a fiduciary.”
A Connecticut jury found that Forstmann Little had mishandled state pension funds. However, they also determined Connecticut State wasn’t entitled to collect any damages associated with its $95 million in losses. The rationale was that the state acquiesced to Forstmann Little for too long before complaining about it.
A class action lawsuit was filed in 2002 that claimed McLeod, Gray, and Davis misled shareholders about McLeodUSA’s financial performance. The claim was settled by McLeodUSA’s insurance company for $30 million. This tiny amount meant that an investor would receive a paltry nine cents per share.
Only in a tragedy as big as the Bandwidth Bust does the story of McLeodUSA, CapRock, and Splitrock not make it into the main body of the book.
Spread Networks#
Spread Networks was made famous by Michael Lewis’s book titled Flash Boys. In 2009 Dan Spivey led the construction of an 827-mile fiber network that connected New York and Chicago in the shortest conceivable path. The only goal was to reduce the transmission time for data from seventeen to thirteen milliseconds. By doing so, specialized hedge fund traders would gain an information advantage over other investors.
These traders used this edge to see order activity before trades were executed. They were able to front run these orders by buying or selling at prices slightly better than the orders about to hit the exchanges. The term high-frequency trading meant they make an enormous number of trades to exploit this information advantage. In the process the hedge fund traders became billionaires.
The use of Spread’s fastest route gave traders this advantage. So long as Spread sold it to only a handful of traders, the lucky customers would have a surefire way to generate enormous gains. In exchange these customers would pay Spread a premium for these fast routes.
Though this sounds wrong, it wasn’t illegal.
Eventually, through regulation and alternative technology of microwaves, the premium available to Spread began to decline.
Spivey, a trader on the Chicago Board Options Exchange, was the brainchild behind Spread. He was hired by a New York hedge fund to devise a low-latency arbitrage strategy that would identify small discrepancies between pricing activity in New York and Chicago. He realized that if the algorithm had access to the fastest path, the opportunity would be almost limitless. Spivey convinced James L. “Jim” Barksdale, the original CEO of Netscape, to back him. Barksdale put up over $200 million of the cash he earned from Netscape’s sale to AOL in 1999.
With the help of Barksdale’s son David, the three of them executed the plan—Spivey as Chairman, David as CEO, and Barksdale as the bankroll with the powerful rolodex. In August 2010 the route was up and being used by the traders.
I visited regularly with Spivey and David in the mid-2010s, including as they started to attend Metro Connect in Miami. Spivey was reluctant to engage in any acquisition discussions, but David showed interest. They knew their original contracts with lucrative pricing were soon to expire. For certain, the renewals would be at lower pricing because of lower-latency microwave routes, but how much lower was impossible to know. Spread, the lowest-latency, all-fiber route, would still command a premium.
Spread was uniquely valuable to Zayo in additional ways, as the route filled a critical hole in our intercity fiber network. Also, I loved the way Spread understood the unique value of its routes and its skill at pricing service in a way that reflected value. As an example, Spread created different tiers of service simply by splicing unnecessary fiber reels onto some routes to slow down the speed. This allowed Spread to sell these slower routes at a lower price than the company’s cherished fastest path.
I saw the opportunity for Zayo to create unique routes by leveraging the combination of the Spread Network and other Zayo assets. Spread would allow Zayo to further strengthen its position as a valued strategic supplier to the financial services community. With all this in mind, we agreed on a price of $127 million in a 2018 acquisition.
This was a win-win deal. The Barksdales and Spivey had already made a great return on their investment, so this was all gain for them. Spread by Zayo became a valuable part of Zayo’s business offerings.
Both Spivey and the Barksdales lived in Jackson, Mississippi. I visited them when we closed the deal, and they treated me to a most enjoyable closing dinner.
TelCove / Adelphia#
TelCove was originally a business unit under the Pennsylvania Cable TV provider Adelphia Communications. John Rigas and his brother Gus founded Adelphia in 1952. In the late 1990s, Adelphia, with over five million subscribers, was the sixth-largest Cable TV provider.
In 1991 Adelphia created a Bandwidth business unit branded as Hyperion Telecommunications. In 1998, as the Gold Rush was gaining momentum, Hyperion went public on Nasdaq, though Adelphia retained 79 percent ownership. Hyperion’s value soared to well over $1 billion. The next year, the name was changed to Adelphia Business Solutions.
The Bust hit Adelphia hard. Needing cash, it raised $1.7 billion when it spun out its 79 percent ownership in Adelphia Business Solutions in late 2001. Four months later Adelphia Business Solutions declared bankruptcy. Two months later, in June 2002, Adelphia also filed for bankruptcy.
During the Adelphia bankruptcy, Rigas and his son Timothy Rigas, who was Adelphia’s CFO, were accused of using $2.3 billion of Adelphia assets for their own purposes. They were also misrepresenting Adelphia’s financial challenges. The father and son were found guilty of conspiracy, securities fraud, and bank fraud. Rigas entered prison at the age of eighty-two and was released nine years later at the age of ninety-one. Timothy Rigas served twelve years behind bars.
When Adelphia Business Solutions emerged from bankruptcy in 2004, it rebranded to TelCove. Adelphia and TelCove dropped lawsuits against one another, with Adelphia agreeing to pay TelCove $60 million and to purchase $39 million in services over five years. Bob Guth, who spent the prior eight years at Adelphia, was named TelCove’s CEO. Soon thereafter, Guth did some bottom feeding, acquiring East Coast fiber assets of Chicago-based Exelon for $49 million. In 2006 TelCove sold to Level 3 for $1.2 billion, consisting of $637 million of Level 3 shares, $445 million in cash, and $155.5 million in assumed debt. At the time of the acquisition, TelCove served seventy markets on the East Coast with a fiber network of 22,000 miles.
Velocita#
Koch Industries originated as an energy business and owned substantial ROW along oil pipelines. It, too, saw an opportunity to leverage these assets by participating in the fiber boom. In 1999 Koch partnered with entrepreneur John Warta to launch PF.Net.
Warta had already launched two fiber companies. In 1988 he founded Electric Lightwave (ELI), which was backed by Citizens Utilities. Warta left ELI in 1991. His explanation to me was that a new chairman was named at Citizens, which caused “everything to fall apart.” Warta described a deal that he orchestrated in which he presold twelve of forty-eight fibers on a route between Vegas and Phoenix, and the customer would pay 75 percent of the cost. As part of the deal, Warta would personally own 10.5 percent of the value of the route—an arrangement that was put in place when he first brought Citizens into ELI as his partner. This didn’t sit well with the new chairman; his solution was to replace Warta with a Citizens executive.
As mentioned in the tw telecom section, Warta founded GST Telecom in 1994. While at GST, Warta developed a relationship with Koch Industries. Warta said he petitioned the GST board to allow Koch to collaborate on a new venture, which was named PF.Net. Joining Koch as financial backers were AT&T spinoff Lucent Technologies and investment firm Odyssey Partners. Together, they invested $700 million.
“We’re excited about the partnership,” said a Koch spokesperson. “We think [Warta] will bring a great knowledge of the telecom business to this venture.”
PF.Net’s strategy was described in the article “Warta Ventures Bags $700M” published by the Portland Business Journal in late 1999.
PF.Net has dubbed itself the company that is building “the network to the net.” Its strategy is to assemble a national communications network that will feature the latest internet transmission technology. The goal is to build a so-called end-to-end fiber optic network that will span the country and allow for the fast transmission of information via the internet. While other telecom players are assembling advanced networks in specific regions, companies such as PF.Net are betting that a unified national network will be more attractive to prospective customers such as phone companies, internet service providers and corporations that would buy or lease space on the network.
This strategy was far from unique. Level 3, Qwest, WilTel 2, and Broadwing were building similar networks.
However, Warta had a card hidden up his sleeve. Warta told me he spent a year in Morristown, New Jersey, where AT&T was headquartered, and convinced AT&T executive Frank Ianna that “these guys at Level 3 are gonna kill you.” Warta claimed that he influenced Ianna to select three upstarts to build AT&T a new nationwide fiber network. The largest portion would be awarded to PF.Net. In late 1999 AT&T selected PF.Net as one of three fiber companies to build out its next-generation intercity fiber network.
PF.Net’s investors must have reached a conclusion that the opportunity was sufficiently big enough that they needed seasoned leadership. They brought on a high-profile chairman who was very familiar to AT&T—Annunziata—following his short reign at Global Crossing.
PF.Net also hired a CEO who had ties to AT&T—Kirby “Buddy” G. Pickle. After he left AT&T, Pickle became an executive at MFS and, more recently, the COO of Teligent, the company headed up by AT&T veteran Alex Mandl. Pickle left Teligent because its business model wasn’t gaining traction. In 2000 the stock price fell from a high of $100 per share to below $15. The Wall Street Journal shared an analyst’s explanation of why Pickle, who was seen as Mandl’s successor, was departing Teligent. “Mandl has taken on a personal mission to turn around some of Teligent’s recent misfortunes, so if Buddy wanted to move up he had to go elsewhere.”
Warta rationalized why Pickle was brought in to replace him as CEO. “My original contract actually expired last December, but the folks from Odyssey Partners asked me to extend the agreement, and so did AT&T. With our new team coming on board, I will step back and let them run things.”
Pickle rebranded PF.Net to Velocita Communications. AT&T climbed aboard as an investor, bringing the total amount raised to $1 billion. The Washington Post published “The Optimist” in late 2000.
Buddy Pickle believes 2001 will be Act I in a dramatic turnaround in the telecommunications sector.
Pickle can’t afford to be pessimistic. He’s leading one of the most ambitious telecommunications start-ups ever, at a time when most broadband providers have been ditched by Wall Street.
Still, Pickle is an indefatigable optimist.
“The people who are going to make money are the guys like us,” who are building the “new economy” equivalent of the railroad,” Pickle said. “It’s not like two years ago, when ideas got money, even foolhardy ones.” No matter what the economy does, “the great ideas will continue to be worked on.”
The Velocita network was envisioned to be over eighteen thousand miles with connections to more than fifty major cities, all operational by early 2002. With the backing of anchor tenant AT&T, and the ability to leverage the AT&T ROW, what could go wrong? Everything turned out to be the answer, as detailed in Chapter V, “The Bust of the Bandwidth Bubble.”
By early 2002 Velocita completed 80 percent of its fourteen-thousand-mile fiber network. Before becoming operational, it ran out of money. In June 2002 it declared bankruptcy.
“Bankruptcy is just another step in that process,” explained Pickle. “It is another step in conjunction with business plans to get rid of overhead and other expenses associated with the services business.” To make sure I follow Pickle, I’ll paraphrase his business plan: Use other people’s money to build out a business, declare bankruptcy so you don’t have to return their investment, then continue on. That sounds like a Dill Pickle.
Bankruptcy, it turned out, was the final step for Velocita. AT&T purchased the assets for $37 million in late 2002. Koch, Warta, and the other investors lost nearly all their $1 billion investment.