ICG Tanks, Depressing Other CLECs

10/01/2000 8:00 PM Eastern

Stocks in the once-hot competitive local-exchange carrier sector dropped like stones last week in the wake of discouraging news from ICG Communications Inc.

ICG stock hit the skids earlier this month after its chairman and CEO-Carl Vogel, who is also an executive at key ICG investor Liberty Media Group Inc.-left the company after less than a month on the job.

The CLEC sector as a whole has taken a major hit in the past few months, as several companies have failed to hit their revenue and earnings forecasts.

Bear Stearns & Co. Inc. CLEC analyst James Henry said that 13 companies-one-third of the publicly traded CLEC universe-either missed their second-quarter numbers or revised expectations. So far this quarter, four CLECs have revised their revenue numbers.

As a result, the sector took a beating, as companies like Allegiance Telecom Inc., Covad Communications Group Inc. and McLeodUSA Inc.-considered among the stronger players in the group-also saw their stocks drop.

Allegiance stock fell 8.7 percent between Sept. 20 and Sept. 27, losing $3.19 per share in the period. Covad dropped 6.1 percent, McLeod lost 8.7 percent, and Time Warner Telecom fell 8.5 percent in the period. Between Sept. 13 and Sept. 27, Adelphia Business Solutions Inc.'s share price fell from an even $15 to $8.

"We see investors losing confidence in the fundamentals of the CLEC business model and moving to the sidelines," Henry said. "What is clear is that there is a shakeout going on in this space."

But Henry said that could bode well for the bigger companies in the sector, who could use this opportunity to make some relatively cheap acquisitions.

One player that likely won't be taken out soon is ICG, which has lost most of its value in the past few weeks.

In April, Liberty agreed to invest $500 million in ICG, a competitive local-exchange carrier based in Denver. In return, Liberty received warrants for 6.7 million shares of ICG common stock and 17.9 million convertible preferred shares.

Liberty, which owns a 24 percent stake in ICG, has seen its $500 million investment in the CLEC dwindle to about $15 million in the past few weeks. ICG stock, which had traded as high as $39.25 earlier this year, was trading at 56 cents per share on Sept. 26.

ICG's troubles began in August, when it said it would not make earnings forecasts for the coming quarter.

Soon after that announcement, Liberty installed executive vice president Vogel as CEO and Liberty chief operating officer Gary Howard to the board of directors, apparently to help turn things around.

But less than a month after Vogel and Howard came aboard, ICG issued another earnings warning-its second in six weeks-and both men soon headed for the exits. Another director, Thomas Hicks of private equity firm Hicks, Muse, Tate & Furst Inc., resigned at the same time.

ICG has since named Randall Curran, formerly chief executive of welding equipment manufacturer Thermadyne Holdings Corp., as its new CEO. ICG also hired New York investment banker Wasserstein Perella & Co. as financial advisor and corporate turnaround specialist Zolfo Cooper LLC.

"The body language from Liberty and Hicks, Muse is that they have walked away," Henry said. "The assumption is that it's 'game over.'"

ICG said customer-service problems, including network outages and equipment failures, would take a large bite out of its revenue for the rest of this year and in 2001. In addition, the company is the subject of at least three lawsuits that claim the company made false statements to shareholders.

Now it appears that ICG's options are limited to two scenarios: bankruptcy or being acquired.

"Bankruptcy for ICG is a real possibility," said UBS Warburg LLC analyst Aryeh Bourkoff, who added that the company's problems are common in the CLEC sector.

There has been some speculation that Liberty could take a debt position in ICG, Bourkoff said, but as it stands now, its equity position is basically worth nil.

"There is some speculation that Liberty will still participate through the debt side of the capital structure," Bourkoff said. "The bonds still have some asset protection in the event of a strategic transaction. But barring a euphoric strategic sale, the equity investment is worthless."

There also has been some talk that ICG could partner or combine with another Liberty CLEC investment-Teligent Inc. But Teligent has its own problems. Its stock has fallen 88.5 percent in the past six months from about $80 per share to $9.22 each, which makes it an unlikely candidate.

CLEC Calamity Strikes

Company Price 9/20 Price 9/27 Change % Change 52-Week High 52-Week Low

Allegiance Telecom







Covad Comm.














Time Warner Tel.







RCN Corp.




























Source: NASDAQ.

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