It's difficult to tell who exactly emerged victorious from last week's MLGW board meeting that finalized approval of the sale of its interest in Memphis Networx to Denver-based Communications Infrastructure Investments (CII). The big losers, however, were easier to spot: MLGW ratepayers, who saw the public utility's $29 million investment in the city's fiber-optic future go up in a cloud of virtual smoke.
MLGW ratepayers once owned 80 percent of Networx but watched that share slip below 50 percent in 2006, when private investors operating under the umbrella of Memphis Broadband, LLC guaranteed a $7 million loan to prop up the sagging business after the Memphis City Council refused to do so. Shortly thereafter, the new majority owners instructed Networx management to search for a buyer, a search that culminated last week with the approval of the sale to CII.
Given the disastrous course this public/private partnership has taken since Memphis Networx' creation in 1999, the fact that a cloud of confusion and suspicion hangs over the final dissolution of that partnership should come as no surprise. Whether such suspicion is justified or not, it isn't reassuring that representatives of Networx and MLGW have been less than forthcoming about how the final deal evolved and, further, have failed to voluntarily disclose several eyebrow-raising facts connected to the sale.
How close, for example, are the private investors and current and former officers of Memphis Networx to the presumed buyer? Close enough that buyer and seller share at least one mutual strand of DNA.
Robert Blow, a Virginia/Memphis-based telecommunications entrepreneur and one of the original investors in Memphis Broadband, was only 52 when he died of a heart attack in July 2002. Based on documents and comments from sources close to Networx, the Blow estate is still involved in Memphis Broadband, a group that includes local investors such as FedEx founder Fred Smith, Dunavant Enterprises, former NBC chief executive Thomas Garrott, and AutoZone founder Pitt Hyde, among others. Blow was also a founding partner of Columbia Capital Partners, one of the venture-capital firms backing CII, the Colorado-based holding company in the process of buying Networx.
Blow was, additionally, a founder of Paradigm Partners, a venture-capital firm that worked with Memphis Broadband to develop a $30 million institutional fund to help finance Memphis Networx. After the telecom crash of 2001, however, the funding environment for telecoms stagnated, and Paradigm bailed on the project shortly before Blow's death.
Current Networx board member Andrew Seamons was also a partner in the Paradigm firm. When Paradigm disintegrated in 2002, he joined Pittco, an investment firm affiliated with retired AutoZone CEO Pitt Hyde. While there may be no direct financial links between Networx' private investors and CII (like all new business environments, the wireless-infrastructure industry has quickly developed its own set of knowledgeable "insiders"), repeated claims by Networx representatives that CII just called out of the blue to see if the Memphis telecom was for sale seem implausible, given the relationship between the original Memphis Broadband group and Columbia Capital.
On July 5th, the day MLGW's board voted to sell Networx to CII, Seamons made it clear that inquiries regarding the private investors' holdings wouldn't get very far. When asked whether any of the Memphis Broadband participants were invested in Level 3 Communications, the prominent infrastructure company that's most likely set to acquire Memphis Networx once its financial situation is stabilized, Seamons explained that lots of people probably own a piece of Level 3, because "it's a big company."
Level 3 Communications isn't directly connected to CII. But CII's founder, Dan Caruso, was a founding executive of Level 3. Caruso was also the CEO of ICG Networks, which was owned by Columbia Capital and M/C Venture Partners and which was ultimately bought out by Level 3. When ICG was purchased from Level 3 by Columbia Capital and M/C Venture Partners, the Denver Rocky Mountain News reported that these two firms stood to "profit handsomely from the deal."
Speaking on Seamons' behalf, MLGW and Networx board member Nick Clark explained that, as an investor at Paradigm and Pittco, Seamons probably knew somebody employed by every group involved in the bidding process.
Possibly true. But what's the real story? Is the telecom infrastructure business a tiny world where everybody's in everybody else's business? Or is it a big world where nobody knows much about anybody? Or is it, as Networx officials would have it, both?
It's a Small World, After All
On the day the MLGW board voted to sell Networx, it was acknowledged that Networx CEO Dan Platko and Tom Swanson, the McLean Group consultant who was enlisted to aid in the sale of Networx, were anything but strangers. In 2000, the two telecom veterans were employed by Intira, a communications company founded in St. Louis by former Networx CEO Mark Ivie. Intira also employed former Networx controller Jeff Rice.
It was also noted that Platko signed a contract offering Swanson $2,000 a day to consult with Networx' sales division through his personal firm, TJSwansonCo, almost two months before Networx approached the McLean Group to assist with the sale of the company.
According to Networx officials, the McLean Group was contacted in December 2006. Platko signed Swanson's contract on October 5th. Previously, Swanson had only been identified in the record as a representative of the McLean Group. It's unclear if Swanson consulted in both capacities simultaneously.
After MLGW's vote to sell Networx, Swanson claimed that he and Platko hadn't done business together since they worked for Intira. Several sources close to Networx, however, say Platko was trying — unsuccessfully — to bring Swanson in as a consultant before Platko was named CEO. Those sources have also told the Flyer that there was a falling out between Platko and his predecessor, Mark Ivie, just prior to Ivie's departure in 2006. Platko and Ivie were friends from their Intira days, and Platko lived with Ivie after being recruited to Memphis. After Ivie's departure in 2006, Networx elevated Platko to CEO.
So who is Dan Platko? Prior to being recruited by Ivie, Platko was employed by Infinium Labs, a video-gaming company out of Florida that became infamous in that industry for burning through tens of millions in investor capital without producing a product. Press releases dating from 2004 identify Platko as Infinium's vice president of operations.
Infinium (later renamed Phantom Entertainment) was founded by Tim Roberts, who also co-founded Intira with Mark Ivie. Platko and former Networx controller Jeff Rice worked for both Intira and later Infinium.
Confused yet? It gets worse. Between his time at Intira and Infinium/Phantom, Platko was employed at a director level for Equant, a division of France Telecom. He worked at a similar level for Relera, a Denver-based managed-services company that launched in January 2000 and partnered with Level 3 Communications — the same company rumored to be Networx' ultimate suitor — shortly thereafter. While there's no evidence that Platko and CII founder and former Level 3 exec Dan Caruso ever met during this period, the incestuous nature of the high-speed infrastructure industry makes the absence of some contact seem unlikely.
What Does It All Mean?
The majority of CII's $11.5 million bid for Memphis Networx goes toward the retirement of Networx' $7 million debt, plus interest. The private investors involved in Memphis Broadband split the $2 million remaining (their original investment was $5.5 million), leaving only a modest $944,000 to be returned to MLGW coffers.
End of the story? Maybe not. Networx posted modest operating profits in 2005, and sources still inside Networx say the company has done better since. Those same sources suggest that the company's outstanding debt — which will be eliminated once the CII deal goes through — is the only thing standing between Networx and sustained profitability. That makes Networx an excellent buy for a holding company like CII, whose plans for the future may well include minimizing overhead, maximizing revenue, and positioning the company for sale at a tidy profit.
Between debt retirement and significant reductions in Networx staff over the past year, it would appear that much of CII's job has already been accomplished. Now money that might have been applied to debt can be used to infuse Networx with additional operating capital, so it can expand infrastructure, attract new customers, and, yes, make money.
Silence Is Golden
Somebody stands to make a lot of money as a consequence of MLGW's $28 million loss. Maybe those people aren't connected to Networx' private investors, but clearly, the high-speed infrastructure business is an insiders' game, and the evidence suggests that there are plenty of insiders on both sides of the Memphis Networx deal — a deal that was presented to MLGW and, more importantly, to the public as a "now or never" choice: Memphians were told that any delay in decision making could queer the deal and send Networx spiraling into insolvency.
Shortly after news regarding Networx' sale was announced, Nick Clark admitted that he'd known the telecom was in trouble for at least two years but kept quiet for fear of scaring off customers. Former and current Networx employees have claimed that the board outlawed the practice of issuing press releases some time ago. No news, good or bad, came out of Networx from December 2005 until the sale was announced earlier this summer. Networx' Web site, for example, hasn't been updated since March 2005.
Intentionally or otherwise, Networx' minority public owners and the city's elected officials were actively shut out of the sale process. Apparently, no one in MLGW management or on the Memphis City Council (which in theory has financial-oversight responsibility for the utility) was aware that Networx was in such dire straits.
Why would the Networx board keep MLGW management and the Memphis City Council in the dark? Why wasn't the council given at least an opportunity to protect the ratepayers' interest in the company by reconsidering their earlier decision not to provide additional funding before being presented with a fait accompli this summer?
In the spring of 2005, at about the same time as Networx' initial request for more money from MLGW, Doug Dawson, a consultant hired to determine a fair market value for Memphis Networx, cited high overhead, big commissions, and immediately vested retirement packages as contributing factors to the company's anemic financial condition.
In reality, most of the concerns listed in Dawson's report had begun changing as far back as 2000, when Mark Ivie replaced Networx founding CEO Ward Huddleston. But once the media started running with Dawson's report, the damage apparently was done. Sources close to Networx say that the negative reports and political squabbling, along with the ripple effect of the 2001 telecom crash, scared off customers and investors alike.
By 2006, however, the telecom industry was in turnaround mode, and Memphis' telecom had posted its first-ever operating profit. According to Networx insiders, debt was the only thing standing between the troubled company and substantial profits. Given an opportunity to explore their options, the City Council may have been more cooperative this time around than they were in 2005. Council members Carol Chumney, Barbara Swearengen Ware, and Henry Hooper have all said as much.
Where Are We Now?
When is a deal not a deal? When lawsuits get filed, of course. Immediately after the CII deal was approved last week, lawyers for New York-based American Fiber Systems filed a declaratory action lawsuit to determine who really presented Networx with the best bid. Ohio-based BTi Corporate, the other losing bidder, is also trying to keep its hat in the ring.
In an angry outburst at MLGW's board meeting to approve the deal, BTi rep Dave McCabe called Networx' bidding process a joke and claimed that the fix was in "from day one."
But was it? Perhaps. Perhaps not. But at the very least, in a world as parochial and interconnected as this one seems to be, the line between insider and outsider trading seems little more than a hazy blur. Stay tuned.
"We don't believe that having a $32-million stake in [Networx] and failing to get a $6-million loan guarantee should result in us losing such a strong equity position," he said, stressing the value of the Memphis utility's majority share in the public/private telecom venture. ...