Cable & Wireless Plc has found a way to escape from its disastrous venture into Internet infrastructure in the US with a deal to sell the bulk of its US assets to Gores Technology Group LLC for $125m.
To make the sale possible, it will put its Cable & Wireless America (CWA) assets into Chapter 11 bankruptcy protection, which it says will permit a restructuring to create a substantially lower cost base. In effect, this will enable the company to wriggle out of much of the 650m pounds ($1.1bn) of lease commitments it built up to house its hosting empire. Under Chapter 11 rules, a company is only liable for 15% of ongoing lease commitments.
C&W estimates the total cost of exiting the US will now be around 300m pounds ($519m), a figure that will include $100m debtor-in-possession financing that it will provide CWA to enable it to continue operations during the court process. Ironically, part of the cost will be rebuilding network infrastructure in the US so that C&W can continue to provide services to multinational clients.
The company announced plans to exit the US in June after concluding that it could never make money assets that are losing $1m every day. It spent around $2.5bn building its business in the US with the acquisition of MCI’s Internet business in 1998, the purchase of Digital Island Inc in 2001 and the acquisition of the assets of bankrupt Exodus Communications Inc for $850m.
However, the huge over-capacity in the industry left it nursing growing losses and the management responsible for its Internet adventures were swept away at the start of the year.
C&W said the US businesses would continue to provide IP and hosting services to its customers through the court-supervised auction process. It expects the asset sale process to be completed by the end of its current financial year on March 31, 2004. Exiting the US will also reduce operating profits by 10m to 15m pounds ($17.3m to $25.9m) in the final quarter.
Privately held Gores Technology, a buy-out specialist that concentrates on salvaging distressed computer software, hardware and telecom companies, will pay C&W $50m in cash and $75m in a loan note. It is open to other bidders to submit a higher offer to the court but there is unlikely to be a rush.
This article is based on material originally produced by ComputerWire.