Friday, October 5, 2007

Memphis NetWorx: Confusion Still Reigns

Posted By on Fri, Oct 5, 2007 at 4:00 AM

Tuesday morning, Councilwoman Barbara Swearengen-Ware offered a resolution (unanimously passed) asking the Tennessee Regulatory Authority not to approve the sale of Memphis Networx, MLGW’s $28-million telecom disaster. The sale is, "premature and not in the public's interest," she said.

On Thursday afternoon, as she solicited votes in front of the Greenlaw Community Center, Ware admitted that she didn't fully understand everything that has transpired regarding Networx' $11.5-million sale to Communication Infrastructure Investments (CII), a heavily financed holding company based in Boulder, Colorado.

"I've never heard of them," Ware said, when asked what she knew about Zayo Bandwith, a Denver/Louisville-based commercial bandwith company founded by a group of telecom executives including CII founders Dan Caruso and John Scarano. Zayo has recently issued a series of press releases touting its recent acquisition of Memphis Networx.

Earlier this summer, Scarano appeared bewildered when councilwoman Carol Chumney asked if his company was willing to discuss forming a partnership with the city of Memphis. After a few one-liners about never having conducted business in public, he allowed that, if Memphis was ready to take on the financial risks of a venture-capital firm, maybe they could talk.

Chumney looked silly, and a portion of the audience -- the middle-aged white guys in suits portion -- chuckled at the blond crusader's naivete. Didn't she know the city had dragged the private investors into the partnership then bailed when Networx needed more dough? Couldn't she understand that business is business no matter who the partners are? And it's not like CII -- a company created to manage risk -- was a commercial bandwith company like the newly minted Zayo.

Ware says she's "offended" that CII refuses to cooperate with the City Council by answering questions pertaining to the management and private ownership of Memphis Networx prior to the company's sale.

Unquestionably, the sale of Networx to CII was a deliberate and successful end-run around the City Council, but the council couldn't enforce transparency even when MLGW was the majority investor in Networx, so it's unlikely to gin up any leverage at this late date. And it's hard to know if Ware's resolution was anything more than political theatrics on an election eve. At best, it's an idea that has arrived years late and millions of dollars short.

Zayo is heavily capitalized, with a quarter-billion in venture capital and the full attention of industry analysts, who are beginning to cite Zayo's immense capitalization as further proof that the great telecom revival has arrived. And Zayo's "we-got-it-come-and-get-it" attitude suggests that attorneys will be unleashed if any roadblocks are thrown up by the council or the TRA. The company's press materials state that while some of the company's fiber acquisitions are still pending regulatory approval, Networx is owned outright by Zayo.

It's a big pill to swallow, but Networx is probably gone. And all suggestions of a public fleecing aside, if there wasn't a question of partial public ownership, the company's sale would have been covered in its entirety in a two-inch column on page three of The Commercial Appeal's business section. It would be over and forgotten by now because, all value judgments aside, in business these things happen every day.

When asked if a bidding process that even MLGW's board of governors described as "flawed" could be considered relative to approving the sale of Memphis Networx, a TRA spokesperson was vague to the point of being unquotable.

And what would happen if Networx' sale to CII/Zayo was somehow reversed? Even in the midst of what appears to be a telecom comeback, its unlikely that the city will find a buyer actually willing to fork out more money for some holding company's sloppy seconds.

And if Memphis decided to go it alone in the telecom biz, ratepayers and/or taxpayers would be called on once again to pony up millions (if not tens of millions) to effectively reboot the entire system and get new and necessary building projects underway.

Two weeks prior to his third-place finish in Memphis' mayoral race, former MLGW president Herman Morris admitted he was too ambitious in his decision to create Memphis Networx as a public/private partnership.

"It's not that it can't work," he said. "But it didn't work here."

Even with a new City Council on the horizon, there's still no reason to believe that it can work here. If Networx executives and private investors have been secretive, our civic leaders have shown a bizarre and counterproductive unwillingness to understand the telecom industry they waded into. Now, like an orphaned baby, they curl up next to the sock monkey of their resolutions, unable to understand that they are alone and adrift, with no easy excuses or answers.

Should the council continue to seek closure and gain a better understanding of what went wrong with Memphis Networx? Absolutely. And an investigation into MLGW might be a good place to start. But its probably delusional to think that reclaiming Memphis Networx would be anything short of disastrous. The only thing dumber than starting the telecom was selling it. Taking it back would be a trifecta of what the insane Captain Queeg called geometric logic.

On Tuesday, City Council attorney Allan Wade pointed out that Networx owes the City nearly $500,000 in unpaid fees. That bill should probably be sent, not to Networx or CII but to Zayo, along with a note asking about leveraging the old debt against a tiny piece of the action.

-- Chris Davis

Read more about Networx.

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