Bouncing back after the crash; Primus Telecommunications claims to have found an alternative survival strategy to the Chapter 11 option pursued by many ailing independent telcos – Telecom Corporate – Statistical Data Included
Several months ago, Primus Telecommunications looked set to join the many other competitive carriers in the Chapter 11 club.
Revenues were declining, EBITDA was negative and the company’s per minute yields on its long-distance traffic were shrinking.
Primus’ exposure to over to separate international markets was also hurting the company, as volatile currencies uncannily conspired to maximize losses from its start-up markets and minimize profits from its mature units.
NASDAQ investors wrote down the stock’s value from over $51 prior to the April 2000 stock crash to an all-time low of less than 30c. Holders of bonds and debt instruments were not too confident either, with Primus notes trading for less than 30c on the dollar.
In late 2001, it looked as though Primus’ cash would whittle away to zero by April 2002, forcing bankruptcy. But a radical strategy and a little bit of luck has averted disaster for now–and the company looks like it might pull off a heroic survival and endure as one of the few remaining independent telcos.
The radical strategy involved using some $200 million of cash raised just prior to the April 2000 tech wreck to buy back distressed bonds at cents on the dollar.
“We were the beneficiary of lucky timing and we had a lot of cash,” admits chief financial officer Neil Hazard.
“Then in July and August, bond prices for telcos such as Global Crossing and Viatel plummeted and we were thrown in with them. Our bonds were selling for such distressed prices that we said let’s use our cash to buy back the debt.
“We bought back some bonds for 13.5c on the dollar–that’s one year’s worth of interest!”
Along with debt-for-equity deals and a generous retirement of debt from vendor Hewlett-Packard, Primus managed to reduce its obligations from $1.3 billion to about $600 million. Not only has this cut debt servicing repayments by nearly half, but Primus now controls 51% of all its debt issues.
Primus is cagey on what this means, but it’s clear that minority bondholders would have trouble forcing bankruptcy on the company or enforcing covenants against Primus’ will. A Primus spokesman says nothing more of the matter than “it is a gray area”.
“I wouldn’t say we had a coordinated strategy (to control debt), more an opportunistic rifle-shot approach. Now we have the luxury of not needing to do something right away unlike some of our peers,” says Hazard.
The company also gained some luck from a $9 million interconnect refund received from Telstra late last year, as well as the move by major US and European long-distance carriers to begin raising rates–in particular, minimum and universal service charges–enabling Primus to improve its own margins.
“Looking at our average revenue per minute, it’s picked up, while our margin has been steady for two quarters and up for one. Our business is heavily weighted towards IDD and we’ve benefited from competitors going out of business,” says Hazard.
Nevertheless, some of Primus’ problems were of its own making.
Like many others, the company was caught up in Internet fever and made an expensive foray into Internet data centers situated in such disparate locations as Brazil and Melbourne, Australia.
“We’re not pleased with the Internet data center market as it hasn’t materialized the way people forecast. The recession has softened demand and although we have the centers set up we’d like to have more customers. In the meantime, we’ve cut back staffing levels to maintenance levels,” says Hazard.
The company also splashed out during the tech boom and bought ISPs in Japan, India, Australia, Germany and Brazil. Anecdotal evidence suggests that the voice-centric culture of management didn’t mesh too well with some of the new data-centric personnel.
The company also started constructing a highly ambitious OC-48 ATM network, using fiber purchased from Qwest, Global Crossing and AT&T.
Unlike many of the wide-eyed and naive CLECs and data carriers, Primus executives led by CEO Paul Singh and several seasoned former MCI colleagues should have known better than to join the dotcom herd.
Throughout late 2000 and 2001, the company was caught between declining margins on one hand and increased operational costs on the other. Currency rate volatility also had its effects. The weakening Australian dollar dampened contributions from what is its most successful international unit while erratic European rates magnified losses there.
All the while, CEO Paul Singh continued to trump up the data center push when both the potential market and the investor community were less than interested.
The company also made things difficult for itself by talking on one hand about exiting low-margin wholesale business and talking on the other about new wholesale VoIP products without convincingly explaining if, or how, there was a margins benefit.
“VoIP is a good alternative wholesale product for less developed countries where there are high termination prices,” says Hazard.
But he concedes that the company is still rolling out the service, not even using it for its own international offices.
Hazard says Primus management also realized that its cost of SG&A was way too high relative to its gross margins. Ten per cent of staff were eliminated and the company pulled back on cap ex to the extent where it spent a miserly $7m on its network in 4Q 2001.
“Our 2002 cap ex is basically what we need to activate customers. We’ve been reducing costs pretty steadily,” says Hazard.
“We’ve seen the cost of transport drop as we’ve got out of a lot of older agreements. We’ve also reduced head count and focusing more on the products and services that people want now such as basic Internet access and E1s and T1s.”
Now the challenge is ahead. The company hopes to nearly double its recurring EBITDA in the first quarter to $20m. If Primus can achieve this number as well as retire more debt, it will reach the point where its earnings may genuinely cover interest and capex payments by the end of the year.
Not everyone is as confident as Hazard. In a recent debt rating report, Standard & Poor’s believes Primus’ 2002 EBITDA target of $75m will be “difficult to achieve in the current economic environment”.
“Primus faces the challenge of aggressively growing its business base in 2002 in the face of ongoing uncertain economic conditions and continuing to contain expense levels,” says S&P analyst Catherine Consentino.
Consentino says S&P has removed Primus from its credit watch list, but also lowered its senior unsecured debt rating to CCC+ on the basis that any future financing will likely be secured and take precedence.
Hazard believes the company can achieve its forecasts and cites lower debt payments as a reason.
“Our debt is 0.6x revenue. If you look at Global Crossing their debt is 9x revenue,” he says.
“We realized a year and a half ago that we had to reduce debt and we began focusing our services on what people were actually buying. We’re in a different position to start with than many of our competitors. Our debt is manageable.”
Unlike many of its contemporaries, Primus may survive the year and even enter profitability without having to bring in a dilutive investor or divest any significant assets. The company still believes it can obtain additional financing. But its strategy has bought it nine more months of life than seemed to be the case in the middle of last year.
If Primus survives it will have achieved what few other independent long distance and Internet data carriers have done, and that’s pull through the slump without seeking protection from creditors or significantly wiping out shareholder interests.
* Reduce debt through equity
swaps and using cash to buy on
the open market for as low as
13c on the dollar’
* Cut staffing in under-performing
units such as Internet data
centers to skeleton levels
* Move low-margin wholesale
traffic and high-cost international
terminations to a VoIP platform
* Cut capex to maintenance levels
COPYRIGHT 2002 Advanstar Communications, Inc.
COPYRIGHT 2004 Gale Group