BlueStar Communications Group, a subsidiary of troubled CLEC Covad
Communications Group Inc., is about to go dark.
Covad -- which acquired BlueStar last September in a stock deal worth $200
million -- said shutting the unit down will reduce its operating costs by about
$75 million over the next 12 months and give the company enough cash to operate
into July 2002.
'This was not an easy decision to make, but one that we felt was important
strategically in our drive to improve profitability,' Covad chairman Chuck
McMinn said in a press release.
BlueStar's cost structure is 'not sustainable and is not supported by its
current revenue-generating capabilities,' Covad said. BlueStar's network served
consumers and businesses in tier-two and tier-three markets.
Covad will assume BlueStar's direct-sales distribution channel over its own
network sales force. Connected to the move, Covad will release about 400
BlueStar employees, but it will hold onto about 70 former BlueStar staffers to
build Covad's direct-sales channels.
Covad has also struck an asset-purchase agreement to offer service to
BlueStar customers, although BlueStar has the right to seek higher offers. Covad
added that it will migrate some BlueStar customers to the Covad network under
its 'Safety Net' program. However, a number of BlueStar lines are located in
central offices that will be shut down. Those customers will be directed to
other digital-subscriber-line providers, Covad said.
BlueStar is expected to shutter operations in 235 central offices, with 144
of them in areas that overlap Covad's network. Following the BlueStar
transition, Covad's network will be comprised of 1,718 central offices covering
almost 50 percent of U.S. homes and businesses, the company said.
BlueStar's shutdown will not impact Covad's integrated-services unit, the
Covad shares -- which are in jeopardy of being delisted from the NASDAQ
exchange after languishing below the $1 mark -- were up 10 cents to 78 cents
each in midday trading Monday.
Last Wednesday, Covad reported a first-quarter net loss of $198 million and
record revenues of $71.2 million on 319,000 subscriber lines.