Big Deal - What Went Wrong?

Posted 08/2000

What Went Wrong?
GST'S CHAIRMAN SPEAKS
By Ken Branson

The U.S. Bankruptcy Court in Wilmington, Del., has tentatively scheduled Aug. 4 for the auction of GST Telecommunications Inc.'s (www.gstcorp.com) assets. The company filed for Chapter 11 bankruptcy protection on May 17.

"Virtually everything" went wrong for the company in the past 18 months or so, according to Robert Ferchat, chairman of the board since the summer of 1998. The company built a fiber optic network without preselling its capacity, and let capital expenditures (cap ex) and administrative expenses get out of control, Ferchat says.

Ferchat also blames the previous strategies GST pursued under his predecessor, John Warta, who left GST's board in June 1998. An aggressive buildout of a fiber optic network on the Pacific rim, including Hawaii and Guam; the purchase of ISPs in Hawaii and California; and the laying of submarine cable between islands in Hawaii all were moves Ferchat and his colleagues wanted to rein in.

In August 1998, GST announced that it was refocusing on its "core business lines of CLEC, data and back-haul services," and it began to sell off businesses outside that core. Over the next several months, the Guam property was sold, and the Hawaiian assets were put up for sale. The GST home division, which provided residential telecom services to multitenant units, was sold, as was the long-distance division.

But, despite what looked like a sound correction effort, red ink continued to flow.

"Most of it was [capital expenditures], but also SG&A [selling, general and administrative expenses] increased," Ferchat says. "As a board, we gave instructions to cut SG&A by 10 percent, but we didn't realize how much cap ex was in the pipeline. And I still don't have a good explanation about what happened with SG&A."

Ferchat confirms that GST discussed selling the company to Adelphia Business Solutions Inc. (www.adelphia-abs.com), ICG Communications Inc. (www.icgcomm.com) and Time Warner Telecom Inc. (www.twtelecom.com). No formal offer was ever presented to the board, he says. He believes GST's mounting debt--$1.2 billion at the time of bankruptcy--scared off potential buyers. Efforts to find private equity were equally unsuccessful, Ferchat says.

Around May 10, Ferchat and the rest of the board decided to file for bankruptcy. They called Time Warner Telecom which signed a letter of intent to purchase GST's assets for $450 million. However, the two companies couldn't come to a final agreement, and U.S. District Judge Gregory Sleet opened the bidding to all comers. The bidding was expected to close on July 31.

Looking back on his experience, Ferchat says, he ought to have checked out GST more carefully before joining its board.

"Certainly, if I ever was to get this kind of deal [again]--and I've talked to a lot of people in my position--I would do a lot more due diligence," Ferchat says. "I thought the company would know the basics about the engineering of a network and the management of cash flow. I don't think there was a real understanding that if you spend $290 million for cap ex, which we did in 1999, you better have a quick way of recovering that. And they really didn't."

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