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360networks upset winner for Touch America assets

360networks, the Vancouver, B.C., company that Touch America hand-picked, is the winning bidder after all to buy the Montana corporation’s fiber-optic assets.

By JAN FALSTAD
Of The Gazette Staff

It was a surprise twist to a hurried and confusing bankruptcy process.

When the bankruptcy hearing adjourned on Friday, Brad M. Kelley, a Florida racehorse and discount cigarette businessman, was the top bidder with an offer of $43 million. Kelley, who owns BC Fiber Acquisition, has become the largest investor in Touch America over the past year and owns 14 percent of the bankrupt company.

XO Communications of Reston, Va., came in second as the backup bidder.

360networks was third and out of the game.

In announcing its bankruptcy filing June 19, Touch America said it had accepted 360networks’ sole bid of $28 million for these assets. Other parties objected and submitted counteroffers with Kelley taking the lead.

At Monday’s hearing in Philadelphia, Bankruptcy Judge Kevin Carey was expected to mop up testimony and approve Kelley’s bid.

However, Carey surprisingly reopened the bidding process and 360networks vaulted from third place to first.

Montana Public Service Commission attorney Monica Tranel, who practices law in Touch America’s hometown of Butte, listened in on the hearing by telephone with growing amazement.

Tranel said it appeared that MCI (formerly WorldCom) pulled the rug out from under Kelley.

Here’s what happened:

MCI, which leases Touch America’s fiber, said Monday it would not promise to transfer all of its contracts to Kelly’s company BC Fiber. No reason was given.

That ruined BC Fiber’s bid because a key revenue source disappeared. BC Fiber asked for time to work things out with MCI. Carey said the request amounted to BC Fiber changing the terms of the agreed-upon deal. He reopened the bidding during Monday’s six-hour hearing and the three companies renewed their competition.

"That was a very bizarre twist," Tranel said. "What we got was (that) the bidding process was entirely reopened."

XO Communications attorney Steve Kortanek objected to reopening the bids.

Kortanek said the judge should automatically accept XO’s bid because it was the runner-up bid Friday.

"We believe we’re the second-highest bidder," Kortanek said. "We’re puzzled as to why we are not selected."

XO also complained that the three parties were bidding on different assets in a confusing "apples and oranges" process.

The hearing continued until 7 p.m. Philadelphia time, two hours after the courthouse elevators and the air conditioning quit.

Despite the complaints, Carey showed interest in ending the bankruptcy hearing by alluding to the high bills from some 30 bankruptcy attorneys in this case. Those costs come out of the remaining Touch America assets and take priority over other creditors’ claims.

"In light of this expensive auction activity, which has already been described to the court, I would be reluctant to have the parties leave the courtroom today without having had the auction actually completed," Carey said.
Showdown poker

Two more bids were run Monday afternoon.

In the first round, BC Fiber stuck with its previously successful bid of $42 million, plus $16 million to be put into an escrow account.

360networks raised its bid from $40 million to $42 million.

XO Communications won this round with a bid of $42.25 million.

The three bidders knew they could play one more hand of showdown poker.

All three submitted sealed and final bids.

When Touch America’s lead attorney Robert Brady opened the envelopes, BC Fiber stuck with its original bid of $42 million.

XO Communications had raised its bid by $300,000 to $42.55 million.

360networks was the winner at $43 million.

"We have determined that the final bid of 360networks is the recommended final and highest bid," Brady said.

Of the $43 million, 360networks is paying Touch America $36 million for the assets. The remaining $8 million goes to cover operating expenses until the sale can be completed by the end of September.

Unless there is another courtroom twist, 360networks wins.
Unanswered questions

Touch America, 360networks and MCI have bankruptcy in common.

Touch America and MCI are in bankruptcy court now. MCI is the new — and original, pre-scandal — name of the former disgraced WorldCom, accused of massive fraud in telecommunications.

360networks completed its twin bankruptcies last fall in courts in Canada and in the Southern District of New York.

Chief executive Greg Maffei led 360networks through bankruptcy. Maffei was the former chief financial officer for Microsoft.

Neither Kelley nor Maffei have returned repeated calls for comment, so it is not clear what the fate of Touch America workers will be: If the buyer will keep jobs in Montana or the headquarters in Butte.

It remains unclear exactly what assets 360networks bought. A side deal to sell some undisclosed assets to Qwest remains active because it was mentioned in court.

Qwest was one of the original five bidders, but dropped out last week as did Pivotal Communications.

In July, the U.S. Trustee who acts as a referee to the bankruptcy proceedings recommended that Judge Carey throw out Touch America’s bidding process because it was biased in favor of 360networks.

Carey made some changes, but approved the process.

As Monday’s hearing wound down, Tranel said she was ready to raise objections to the sale for the state of Montana.

When the judge asked if there were any objections, she didn’t say anything because the process had changed so much she wasn’t prepared to comment. Tranel said she must do more research to see if the state still can object.

At the end of the hearing, Judge Carey dismissed remaining objections, including those of Gryphon Partners of Dallas, which owns 3 percent of Touch America. Gryphon was interested in preparing a possible bid, but gave up when Touch America filed incomplete and possibly inaccurate financial numbers.

Carey also dismissed complaints by New York attorney Charles Reinwald and Eugene, Ore., attorney Marjorie Schmechel, both investors. She is a Butte native whose father Paul Schmechel used to run Montana Power, the now-defunct parent of Touch America.

Both attorneys were among several investors complaining that this bankruptcy was too hurried. Schmechel said since Touch America hasn’t offered financial statements for a year, no outsider knows for sure what assets are left, and no one can tell if this sale is a good deal.

In June, Touch America President Mike Meldahl called 360networks’ original proposal of $28 million the "highest and best offer."

Now that the Canadian company has raised its bid to $43 million, Schmechel chided him.

"I’d like to say this about Mr. Meldahl," she said. "Apparently, your best wasn’t good enough, not even from the inception of this plan."

Touch America’s board of directors must approve the sale, which was supposed to happen Monday night or today. The sale should be finalized Thursday in bankruptcy court.

Tranel said this process has been confusing at best.

"Bankruptcy is really a different ball game," Tranel said. "These guys go in there and the cards are already dealt."

Jan Falstad can be contacted at (406) 657-1306 or at [email protected].

Copyright © The Billings Gazette, a division of Lee Enterprises.

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