Thursday, July 5, 2007

The Tipping Point?

Posted By on Thu, Jul 5, 2007 at 4:00 AM

BY CHRIS DAVIS | JULY 4, 2007

Was there misleading language in The McLean Group's report to MLGW and Memphis Broadband LLC, regarding the sale of Memphis Networx? And if so, was it merely a case of sloppy writing, or a deliberate attempt to steer MLGW's board of Governors to favor one of the top three bidders?

The highest bid was placed by BTi Corporate, an Ohio-based telecommunications company. BTi, which recently became the first private sector entity to land a contract managing and securing data for the US Department of Defense, put forward a bid of $20-million. Contrary to some early reports, the BTi bid was all cash.

"It's astonishing to me that [Networx] was paid for by the people of Memphis, but it's done nothing for the people of Memphis," says Paul Allen, BTi's founder and CEO (No relation to Paul Allen, co-founder of Microsoft). Granted, as a jilted suitor in this deal, Allen may simply be grinding axes, but his assertion that BTi has been misrepresented in The McLean Group's assessment has more than a grain of credibility.

According to The McLean Group's report, Communication Infrastructure Investments (CII) submitted the preferred bid, not because CII made the best offer, but because the Denver-based holding company was "fully financed" and could close on the proposed $11.5-million in about a month. The report stresses the value of fast cash over any benefits, real or perceived, to MLGW ratepayers who owned 80% of Networx until 2005 when the Memphis City Council refused to authorize a $6-million loan, and the utility company's stake slipped to 49%.

CII's money, it should be noted, wasn't just fast, it was also impatient. Their proposal included a provision wherein the negotiated price would drop by $1 million if the Memphis City Council became too deeply embroiled in the decision-making process.

MLGW/Networx board member Nick Clark has further suggested that any delay in closing the deal might yield negative results. On the surface, this appears to be a deal designed to avoid both complications and public scrutiny.

The McLean Group's report also states that American Fiber Systems (AFS) of Rochester New York and BTi, "needed to raise funds." More specifically, the report noted that BTi, whose proposal appears to be the most community-oriented of the lot, "was not fully financed, and would need to raise funds to complete the acquisition." A June 28th report by Commercial Appeal reporter Tom Charlier echoed the McLean Group's findings in an article headlined, "Cash Readiness tips Networx Deal." Case closed, right?

Hardly. The veracity of The McLean Group's report and Charlier's subsequent article turns on the definition of a "need to raise funds." The description implies that AFS and BTi didn't have ready access to the necessary capital, and would have to hunt for investors. In the case of BTi, at least, that simply isn't true.

"Of course we didn't have $20 million just laying around," says Allen. "But we had banks that were ready to give us the loan after completing a process of due diligence."

The McLean Group's report states that CII, AFS, and BTi all went through due diligence. Allen disagrees with that assessment. BTi was ultimately granted two days to look at Networx's facilities, and ask questions. According to Allen this minimal access was granted only after a number of miscommunications and outright squabbles with Networx executives. All questions relating to finance were placed strictly off limits, he says.

For the past eight years Memphis Networx has functioned as a publicly-owned utility only when it needed more money from MLGW. Whenever the media, or the City Council, asked where the money went, Networx conveniently became a private company, and the books were summarily closed. Nevertheless, Networx has at least some history of submitting financial information to potential buyers.

There were two separate attempts to sell Networx to AFS in 2004 and 2005. After reviewing Networx information, AFS expressed worry about Networx's lack of recurring revenue, so Networx financials were reworked and resubmitted in order to address these concerns. In documents obtained from sources close to the company, Networx board member Andrew Seamons expressed additional concern that the reworked financials might make Networx appear to be an even less attractive buy. (Financials referred to are not Memphis Networx books but reports delivered to AFS as part of a process of due diligence.)

Additional documents suggest that Seamons' concern was eventually allayed. Seamons is Managing Partner of Pittco, an investment group affiliated with Pitt Hyde, one of Networx's original private investors.

As the Flyer has previously reported, it was current Networx CEO Dan Platko who hired Tom Swanson, first through the consultant's own company, TJSwansonCo, and later through The McLean Group. Platko and Swanson were both previously employed by Intira, a company founded by former Networx CEO Mark Ivie.

Allen has a lot to say about the Networx bidding process, and very little of it is nice.

"We offered to come in and run the company during the process of due diligence," Allen says. "We were ready to come in and start writing checks to help get Networx out of debt. If at the end of the process we decided not to buy, we would have just walked away and Networx could have kept the money. I don't mind spending half a million dollars in order to find out whether or not I'm buying a bag of bones."

BTi's proposal included a plan to develop funding for Memphis Bioworks, in addition to providing Bioworks with a 100 Gigabyte Portal, and access a national network, which could solidify Memphis as a research hub for the development of biofuels. BTi also proposed the creation of a citywide wi-fi mesh.

Allen says MLGW was also encouraged to reinvest its share of the selling price back into the telecom company. Considering the public utility's rocky 8-year relationship with Networx, however, it's easy to understand why some of MLGW's board might be reluctant to do so.

"Of course we want to partner with the city," Allen says. "Primarily because they control the right of way. It just makes things much easier that way... and it would give MLGW an opportunity to get back more from its investment."

Allen isn't alone in his sense that the Networx rushed sale fails to consider the best interests of MLGW and its ratepayer-owners. Last week AFS's CEO Dave Rusin exchanged information with City Council chairman Tom Marshall, expressing his belief that, in spite of contrary claims made by MLGW and Networx, the Council's approval is required before any sale can take place. Rusin was unavailable for comment, but did provide documents pertaining to correspondence with Marshall and the City Council via email.

As the Flyer reported Tuesday, Tom Swanson, the consultant hired to match Networx up with the best available buyer, may or may not have been an unbiased party in the transaction. Perhaps it's all smoke and no fire, but given the $2000/day Swanson was initially offered by Platko, and a possible history with both Platko, and his Networx predecessor Mark Ivie, it's clear that the circumstances surrounding this transaction require more consideration than the current timetable allows. If CII's offer is as sincere as it seems to be, certainly they can wait another month.

"If MLGW's worried that they'll lose a million dollars in the deal, I'll pay them $1 million for their 49% of the company right now," Allen says. He laughs, because he knows it's an absurdly low price for MLGW's share. But as it stands MLGW is only slated to receive $994,000 for its $29-million investment, and Allen is completely serious.

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