Cable & Wireless Sells US Operations in Bankruptcy Deal
8th December, 2003
The purchase by a unit of Gores Technology Group allows Cable & Wireless to exit its unprofitable US hosting business, which includes assets bought from Exodus and Digital Island. The bankruptcy filing will allow the company to dramatically slash the cost of exiting leases of surplus data center facilities. Under Chapter 11, debtor companies can reject leases for unneeded properties, and renegotiate leases to reduce costs going forward. As part of the bankruptcy filing, Cable & Wireless will provide the US unit with $100 million in debtor in protection (DIP) financing. This type of loan must be repaid prior to pre-bankruptcy financial obligations.
The sale will require the approval of a U.S. bankruptcy court, and other suitors will be able to offer competing bids, which would be resolved through an a court-supervised auction. The final price for Gores' offer may be adjusted lower if Cable & Wireless America (CWA) does not meet benchmarks for revenue, working capital and expenses, with a set minimum price of $50 million. Gores, which was among the parties pursuing Global Crossing, will pay $50 million in cash and $75 million in a note.
C&W announced its intention to exit the US hosting market back in June, and has since closed eight US data centers and reduced staffing by 1,000 workers, cutting costs by $167 million (100 million pounds) from the second half of 2002. More cuts are likely to precede the sale to Gores, as Cable & Wireless has hired two executives from Alix Partners, a specialist in distressed assets, to oversee the disposition of the American operations. Several Alix Partners executives were hired by WorldCom last year to oversee that company's restructuring and asset disposal.
As recently as Nov. 20, Cable & Wireless CEO Francesco Caio had signalled that a deal for the US unit was unlikely to be announced this year. The current timetable calls for the sale to be completed before the end of March 2004. Caio said the cost of the exit from the US is expected to be $300 million GBP (about $520 million). Last year the company estimated its US property lease obligations at $667 million (400 million pounds), while the hosting operation was losing money at an annualized rate of $425 million (255 million pounds).