Li’s Latest Salvage Job?

Bandwidth, the capacity of a fiber-optic line to transmit data from one place to another, was considered to be a commodity for which demand was virtually limitless. But as investors in U.S.-based telecommunications company Global Crossing have learned, “endless demand” turned out to be another New Economy nostrum. Anticipating a data tsunami that never came, Global Crossing built a $10 billion, 160,000-km fiber-optic network spanning two oceans and four continents. Last week, the New York Stock Exchange-listed company filed for U.S. bankruptcy court protection in order to restructure its $12.3 billion debt.

But there’s at least one person who believes Global Crossing will rise again: Hong Kong Uber-dealmaker Li Ka-shing. Through a partnership between Hutchison Whampoa, Li’s Hong Kong ports/telecoms/electric power conglomerate, and Singapore Technologies Telemedia (STT), owner of Singapore’s third-largest phone company, Li has engineered a rescue package. The two companies have bid $750 million to help recapitalize and restructure Global Crossing. If the plan is approved by the courts (it’s likely to be controversial because the proposal calls for holdings of mom-and-pop shareholders to be wiped out), Hutchison and STT will wind up owning 70% to 80% of the telecommunications company.

The deal looks like a vintage Li maneuverhe is legendary for scooping up unfashionable assets at bargain prices and selling them later for a fat profit. Among other recent coups, the billionaire bought into American e-tailer Priceline.com following the crash of Internet stocks, and saw his stake triple in value. The Global Crossing bailout would hand the partnership majority ownership in a state-of-the-art, globe-spanning telecommunications infrastructure for an outlay equal to less than one-tenth the cost of building it. “I think at that price it’s very attractive as an investment,” says To Chee Eng, a telecoms analyst for Gartner. “Global Crossing went out and built an enormous network.”

Unfortunately, their timing was bad. During the giddy days of the Internet bubble, when the amount of data transmitted over the Web was doubling every month, Global Crossing’s international network seemed like the right idea at the right timeinvestors certainly bought into the conceit, driving Global Crossing stock price up to a peak of $60 in February 2000. As Internet traffic has slowed, however, that optimistic build-out has resulted in a fiber-optic gluttoo much capacity and too little traffic. Transmission prices on some routes fell 50% a year in 1999 and 2000. Analysts estimate that less than 5% of Global Crossing’s total capacity is being utilized. “They built a formidable network, but they got caught between rapidly mounting debt and a stalled market for long-haul bandwidth,” says TeleGeography analyst Stephan Beckert.

Li’s interest in the company is partly defensive. Hutchison Whampoa has already sunk $400 million in Global Crossing through a convertible-bond holding, which Li could lose in the bankruptcy. Hutchison Whampoa assumed the bond when it took a stake in Asia Global Crossing, a regional subsidiary of Global Crossing.

What’s unclear is whether Li and STT plan to sell relatively quickly or hold for the long term. Li expands his empire when he sees opportunity. His Internet vehicle, Tom.com, has been gobbling up media assets, including advertising companies, newspapers and magazines, in China and Taiwan. Over the past several years he has also acquired mobile-phone carriers throughout Asia, and holds big stakes in emerging 3G mobile networks in Europe. Analysts say a restructured Global Crossing could be a formidable and eventually profitable competitor in the international fixed-line business. But it’s uncertain when the mammoth oversupply of undersea capacity will be matched by demand.

Hutchison Whampoa and STT officials declined to comment on their strategy. Analysts say it’s unlikely Global Crossing is a long-term play. “Hutchison has been getting out of fixed line,” says Eddie Lau of ABN AMRO. “This would be a big departure from their strategy of focusing on 3G and mobile networks. Selling it down the road after demand comes back makes the most sense.”

That’s assuming the deal goes through. In the wake of the Enron debacle, questions are being raised about Global Crossing’s aggressive accounting practices. And even if a bankruptcy judge approves the bailout, it could take another dotcom boom for the investment to pan out. Li, however, doesn’t mind taking big risks for big rewards.