Genuity files for bankruptcy protection

Genuity files for bankruptcy protection

By Reuters
November 27, 2002, 4:10 PM PT

Genuity, a high-speed Internet services provider, on Wednesday said it filed for bankruptcy protection and agreed to sell its assets for about $242 million to Level 3 Communications, a rival backed by billionaire investor Warren Buffett.

Broomfield, Colo.-based Level 3, which recently got an infusion of $500 million in funding from a group led by Buffett, has made no secret of its interest in using that money to fund acquisitions.

With the Genuity deal, Level 3, a high-speed communications company, gains Internet access services, more than 3,000 customers including America Online, and one of the oldest pedigrees in the industry. In 1969, Genuity's predecessor, BBN Corp., designed and helped build ARPAnet, the basis for today's Internet.

Genuity, which provides data transmission, Internet access and security services, and Web site hosting, is the latest communications company to buckle under the weak economy, slim demand from corporate customers, and a glut of high-speed network capacity.

Woburn, Mass.-based Genuity defaulted on its debt in July after Verizon Communications, its former parent company, decided not to rescue the money-losing company. Verizon was forced to spin off Genuity as a condition of the merger of Bell Atlantic and GTE that created Verizon in 2000.

Genuity, which has been in talks for several months to renegotiate the terms of its debts, has $1.9 billion in assets and $4.0 billion in debts, according to the Chapter 11 bankruptcy filing in the U.S. District Court for the Southern District of New York.

Genuity's creditors will receive the money Level 3 is paying for Genuity's assets, as well as additional cash on Genuity's balance sheet after the close of the transaction.

The bankruptcy filing named the largest creditors as Chase Manhattan Bank, a paying agent for bond debt of $1.15 billion, Verizon and affiliates, with bank and trade debt of $1.35 billion, and Allegiance Telecom, with trade debt of $304.5 million.

With more than $800 million in cash to fund the company's operations, Genuity said it will continue to operate without interruption during the transitional period.

Level 3 said the deal preserves its fully funded status and accelerates its push to become free cash-flow positive. It said the similarities between service offerings and geographical reach will allow it to cut costs and increase sales.

Analysts expect other communications network operators to merge as the industry grapples with an abundance of unused capacity and weak demand.

Level 3 and Genuity expect the deal to close in the first quarter of 2003, pending bankruptcy court approval. Under the bankruptcy proceedings, a new suitor could emerge during an auction of Genuity's assets.

Level 3 will acquire Genuity's brand name, its high-speed data network and operations, and its customer base, including lucrative accounts with Verizon and America Online, the Internet services unit of AOL Time Warner.

Verizon and America Online accounted for greater than 60 percent of Genuity's $223 million in revenue for the third quarter of 2002.

Genuity also offers a rich history of technology innovations. It developed the first Internet router, delivered the world's first electronic mail message and pioneered the use of the "@" symbol as the universal addressing standard for e-mail.

The agreement with Level 3 has the backing of Verizon, and all but one of Genuity's banks. Allegiance, which provides data services to support Genuity's contract with America Online, also endorsed the agreement and said it would work with Level 3 in the future.

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