Friday, March 28, 2003

Broadwing takes big quarterly hit

By Mike Boyer
The Cincinnati Enquirer

Broadwing Inc. on Thursday reported a fourth-quarter $2.4 billion loss after noncash charges for its broadband business and announced a financial recapitalization as it exits the money-draining operation.

"We're not home yet, but we're making excellent progress," said Kevin Mooney, CEO of Broadwing, the parent of Cincinnati Bell. The company last month announced plans to sell its Austin, Texas-based Broadwing Communications Inc.

Completion of the sale to C III Communications LLC, a new, private company, for $129 million, is expected by midyear. It will unwind Cincinnati Bell's unsuccessful 31/2 -year attempt to become a player in the national telecommunications market through its $3.2 billion acquisition of IXC Communications Inc. After the sale, the company plans to refocus on its Cincinnati wire-line and wireless businesses and reduce debt.

Mooney, who succeeded Rick Ellenberger in September, said the key issues ahead are completing the broadband sale and keeping Cincinnati Bell "strong and healthy" so it can pay down the $2.5 billion in debt the company will have after restructuring.

In the fourth quarter, Cincinnati Bell generated about $69 million in cash, after interest and taxes and other expenses, he said. On an annual basis, Mooney said, Cincinnati Bell should generate up to $250 million in cash, which will allow the company to reduce the debt to about $2 billion by 2006.

The key elements of the financial recapitalization include:

• Amendment to its existing bank credit agreement, extending a repayment schedule to 2006. The old agreement called for the company to repay about $1 billion next year. The new amendment increases the interest rate from its current 4.9 percent to about 5.5 percent.

• Completion of $350 million in new financing from Goldman, Sachs & Co., $220 million of which will be used to reduce about $1.7 billion outstanding on the bank credit agreement. The balance will be used to pay fees and be added to the company's line of credit.

• Expects to exchange up to 26 million new shares of Broadwing stock for the 12.5 percent preferred shares of Broadwing Communications and 9 percent senior subordinated debt of Broadwing Communications. Face value of that debt, which the company inherited in the IXC acquisition, is about $441 million. Broadwing now has 218 million shares outstanding.

Mooney said selling the broadband business and the recapitalization will allow Broadwing to rebuild its financial structure and build value for shareholders who have seen the stock plummet more than 90 percent from its peak.

Thursday, Broadwing's shares closed down 15 cents, or 3.5 percent, at $4.15.

Matthew McGeary, senior research manager for Cincinnati's Fort Washington Investment Advisors, said the recapitalization "is not without pain." But getting out from under the broadband business will allow Bell to pay down the remaining debt, he said.

With the broadband sale, Broadwing will retain about $800 million in operating losses from the business and another $1.2 billion with the write-offs announced Thursday.

That $2 billion in losses will allow the company to avoid income taxes for a number of years. Mooney said the company would use those funds to pay down debt.

For the fourth quarter, Broadwing reported a net loss equal to $10.92 a share, mainly as a result of a $2.2 billion write-down of the broadband assets.

Excluding that write-off and other one-time items, the company said it lost 12 cents a share in the quarter, less than the 17 cents estimated by analysts.

Revenues for the quarter declined 8 percent to $503 million, although Cincinnati Bell's revenues increased 4 percent.


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