Banks shudder as telco giant falls

Richard Inder12 April 2012

GLOBAL Crossing, the former high-flying US telecoms company that bought Racal Telecom for £1bn just over two years ago, has succumbed to its £9bn debt and filed for bankruptcy protection.

The collapse - believed to be the largest so far for a telecoms firm - will weigh heavily on its lead banks, JP Morgan Chase and Citibank. Both have suffered from a string of high-profile failures including energy giant Enron. They are also exposed to UK cable company NTL, which is due later this week to name the investment banks to help it solve its own £12bn debt crisis.

It is also more bad news for accountancy firm Arthur Andersen, which audited Global's accounts and is already caught up in the Enron scandal.

In contrast to Enron, Global has found a saviour in the form of the opportunistic Hong Kong telecoms investor Hutchison Whampoa and its partner Singapore Technologies Telemedia. They have agreed to invest £535m for a majority stake.

A Global spokesman refused to rule out cuts among its 1,800 UK staff, but said they were safe until the Asian investors negotiate a compensation package with Global's bondholders and devise a new strategy for the firm.

Bondholders are expected to get a mixture of cash, shares and new bonds, while shareholders will lose everything. The shares, down 98% in the past year, were halted in New York after plunging 21 cents or 41% to 30 cents in pre-market trading.

While under the leadership of Bob Annunziata, Global expanded too quickly, taking over a string of companies. But a key £26bn merger with US West fell through. Global also overestimated the demand for its services and underestimated the strength of the competition. Annunziata has since left.

The Bermuda-based group employs 8,000 people in more than 200 cities in 27 countries, and sells phone and data services to governments and large businesses.

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