In the News The M & A Journal

A Six-Month Frenzy

It was four in the morning. The deal had been painfully coalescing over the last several weeks and days and hours, and was now achingly close to finality.

Within minutes it spilled out of control like mercury.

Just as quickly, it came back together in a different form.
Williams Communications Group was hoping to enter Chapter 11 with a pre-packaged restructuring plan that hinged on $150 million in new money from its erstwhile parent, Williams Companies Group. But the two sides couldn't come to terms. Richard Wynne of Kirkland & Ellis, advisor to the bondholders had just come in to the Jones Day conference room in New York that served as command central. "We're never going to be able to do a deal with these people," he said. Indeed, advisors to Williams Companies, including Thomas Lauria of the Miami office of White & Case, were leaving the building.
Corrine Ball of Jones Day and Tim Coleman of The Blackstone Group, among the many other advisors in the room, looked at Mr. Wynne from across a table covered with documents and coffee containers and all the familiar detritus of dealmaking. It was Friday, April 19 and in four days would come the year anniversary of the spin-off of Williams Communications Group, a key deadline to meet if creditors' possible rights against the former parent were to be preserved. Was all the work about to be for naught?
Mr. Wynne was not finished. "Here's a structure I think will work," he continued. "We'll do it without them. Let's get the $150 million we need from another investor."
After all, Williams Communications was a strong company, despite its heavy debt. A long distance network, its customers were other telecom companies; its rivals were WorldCom, AT&T, and Sprint. Its anchor customer was SBC Communications Inc. With that exclusive twenty-year supply contract, Williams Communications actually had revenue, unlike so many of its confreres in the industry. Mr. Wynne suggested that Williams and its financial advisors at Blackstone simply find a substitute for the reluctant former parent. Recalls Mr. Coleman: "It was like a light bulb. Everyone agreed. At four in the morning, the deal had fallen completely apart and an hour later it was put back together, and made more simple by doing without Williams Companies."
Credit for making it simple also goes to Leucadia National Corp., a New York investment bank that was the winning bidder. Says Irwin Gold of Houlihan Lokey Howard & Zukin, advisor to the out-of-court bondholder committee that became the official creditors committee: "What separated Leucadia from the other bidders, who were only offering capital, was the solution to the issue of what to do with Williams Cos., the former parent. Without Leucadia, there would have been a three-way discussion about how to divide up the equity of the new company, among the new money, the former parent, and the bondholders. Leucadia cashed out Williams Cos., which simplified and streamlined the process."
There were still six months to go, however. And those six months would involve last-minute arguments before Judge Burton Lifland by Corrine Ball that finally herded SBC into the corral, crucial licenses granted late in the process by the FTC, and perpetual negotiations with the fractious bondholders, banks, board members, and shareholders.
Not to mention the fact that in the midst of all this the energy industry collapses, what with Enron and the California mess, and the former parent company itself stares straight at bankruptcy. Recalls Mr. Lauria of White & Case: "My client suddenly gets credit downgrades and the stock price goes through the floor, and they're suddenly not sure of their own future. They arrange to borrow a billion eight and to sell assets to bring in another billion or two. We almost had dueling bankruptcies. It was one more crazy thing that happened in this deal."
Indeed, it was only on December 1 that some of the key advisors got their fees.
Says one of the relieved: "We didn't know it was going to work until we got the final $180 million out of escrow that Monday. Until then, many of us were walking around in a funny position. With cheeks puckered."
Angry Banks
In the early 1990s, Williams Cos. was the first to come up with the idea of running fiber optic cable through its network of decommissioned pipelines. Through this network of unused gas pipes, Williams created a telecom network, which it sold to WorldCom. Williams retained certain assets and a single strand of fiber optic cable and, when their non-compete agreement with WorldCom expired, they ramped up the business once again.
From the beginning, says Mr. Lauria, the company wanted to separate the two businesses. The strategy became particularly attractive, he says, after the initial public offering of the communications company when the indicated value of that company, based on the 19 percent of stock now publicly traded, exceeded the combined market cap of the parent. What's more, the energy company was generating $2 billion of after-tax income, but the market was punishing its stock price because it owned 81 percent of a telecom company.
In April of 2001, Williams Companies spun off Williams Communications to shareholders in a tax-free transaction. Prospects for the newly independent telecom looked good. It had a couple of billion in liquidity, recalls Mr. Lauria, which, by all measures, was enough to fund the company's capital deficits for at least two-and-a-half years. "Williams Communications Group is a provider's provider, if you will," Mr. Lauria points out. "They don't sell directly to the consumer but to other networks. They provide a spine for SBC, for example. Despite the rest of the industry coming down around them, they were doing so well that in the third quarter of 2001 they started buying in their own bonds at a discount-$500 million at 40 cents on the dollar. They wanted to deleverage their balance sheet and take advantage of the discount. The banks went ballistic."
Indeed they did. Agents for the Asian lenders charged into the offices of Williams Communications and demanded to know how a telecom company could justify using cash, its scarcest resource, to pay off what the banks saw as junior securities, structurally subordinate to their own claims.
"Think about what was going on in the industrial space at the same time," says Corinne Ball. Level 3 Communications Inc. had just completed a massive tender offer for its bonds. RCN Telecom had made the same move. Banks and other lenders had seen telecom companies burning cash to retire debt before many had come close to breaking even and often just before many liquidated for under ten cents on the dollar. Says The Blackstone Group's Tim Coleman, advisor to Williams Communications: "The banks were saying: `Don't spend my cash. Unless you can show me you have a viable business, don't spend my cash.'"
The banks not only blasted Williams Communications for spending the cash, but also demanded to know why it had not yet retained restructuring experts. Enter Jones Day's Corinne Ball and The Blackstone Group's Tim Coleman. Ms Ball's first task was to evaluate the banks' vehement objections to the bond repurchase. Did they have a viable claim that Williams Communications by buying back the junior bonds had defaulted on its obligations to the banks?
Her answer was no. "Although the banks were angered, although the banks wanted to be heard, although the banks wanted to stop this program, they did not have an absolutely clear path to achieve their objectives through their documents," she says. "I said, `These banks frankly don't have a leg to stand on. Tell them we're entitled to run our business as we see fit.'" Mr. Coleman, says Ms Ball generously, had a more long-term approach. "Tim was saying, `Well, it may be good that you and your banks don't have a default fight right now, but let's think about how you're going to live with these banks into the future, a future that will entail a much more strident and difficult telecom market.' " Mr. Coleman concurs, noting that The Blackstone Group would have advised the company to have approached the repurchase of its bonds with far more caution.
Anyone familiar with bankruptcies and restructurings knows that educating the client is one of the most important tasks. This case was unusual in that the company both had a respectable amount of cash on hand and a significant source of revenue from anchor client SBC. Because it was so different from other failing telecoms, it was that much more difficult for management to see a Chapter 11 filing as a good thing. Explains Mr. Coleman: "The company felt, and rightly so, that they were a better company than some of their predecessors who had gone down into liquidation. They had customers. They had a network. They had a very large relationship with SBC. This was clearly a good business, which made some of the analysis harder for the company."
Williams Communications' first instinct, with its banks playing up, was to replace the banks with new lenders. Says one restructuring expert: "All companies think they have all these great relationships with financial institutions around America, but what they don't realize is that those relationships exist as long as they can continue to pay fees and cause no risks. They all think they can go out and get more help from these people who have always been there with the love and the hugs and the golf outings. And the underwriters are saying, `I'm here for you. Why don't we try this issue, or why don't we try that approach.' And then the banker comes back sheepishly and says, `Well, okay, we can't get credit approval for that.' So the company quickly found out that none of its lenders was going to put any more money at risk."
Getting Rid of Debt
As it worked with its financial advisors at Blackstone, the company next began to look at the possibility of some kind of M&A transaction. It did not want to appear to be a seller in distress but it had not achieved positive cash flow and, with its debt of around $6 billion, interest payments were hitting between $500 and $600 million a year. Says Ms Ball: "Who is going to buy this company, or invest cash in it, when it has $6 billion worth of debt on its balance sheet?" Blackstone advised the company to file for Chapter 11, restructure itself, and eliminate the debt. A new investor or an acquirer would then look at the company with far more optimism.
"There are three kinds of companies that go into Chapter 11," explains Blackstone's Mr. Coleman. "There is the kind that is never going to survive. This is the company with a bad business and a bad balance sheet. Then there is the company that has a bad business and an okay balance sheet. They need to fix that business and use the bankruptcy court to help them fix it. This might be a big retailer that needs to get rid of a group of contracts or shed stores. The third kind of company that goes into Chapter 11 is the one that has a good business and a bad balance sheet. This was Williams Communications."
Blackstone convinced the company that it needed to get rid of its debt and that the only way to do that was to file for Chapter 11. "We do think that you can get through this negative cash-burn period and become a cash-flow positive company. But even when you get there, your company will not make enough money soon enough to continue to meet this interest burden. Therefore, what you need to do is go into Chapter 11 and wipe out this debt," recalls Mr. Coleman. "That was the analysis."
Williams Communications and its advisors struggled to put together a package that they could take into court. The former parent, Williams Companies, and the bondholders would share the equity in the reorganized company. Williams Companies would make an additional loan of $150 million so Williams Communications could pay down some of its bank loans.
Williams Cos. had agreed to serve as guarantor for a $1.5 billion note that Williams Communications had issued to a trust, which, in turn, had sold $1.4 billion of that amount in a private placement. "With bankruptcy imminent," recalls Thomas Lauria of White & Case, counsel to Williams Cos., "we wanted to eliminate covenants in those notes that would have caused an acceleration on a bankruptcy of Williams Communications. We agreed to support their Chapter 11 strategy and they agreed to our consent solicitation to get certain of those covenants eliminated. We defused the risk that we would be on the hook for $1.4 billion. That was done in March."
Williams Cos. had also provided a guarantee for $753 million in synthetic lease financing Williams Communications had taken out to build out a portion of its network from Houston to Washington, D.C. "They exercised their right, or purported to exercise their right, to purchase equipment covered by the lease. We, as guarantor, were then obligated to pay the purchase price on their behalf," says Mr. Lauria. "We felt the exercise was not proper. We advised them that we would block the deal, or that we might not fund it, or that we would insist on being treated as a senior secured creditor as to the equipment purchased by that financing. We reached an accommodation and we did fund the purchase."
The centerpiece of the agreement would be $150 million of new money from the former parent company. "It took a lot of work to arrive at that number," recalls Kirkland & Ellis's Richard Wynne . "That amount of money would have enabled the company to pay down its bank debt and proceed with a restructuring." But in the gray hours before dawn that April Friday, that arrangement collapsed. Says Mr. Lauria, counsel to Williams Companies: "We withdrew from the discussions."
All appeared lost until, with Mr. Wynne 's light bulb, Blackstone took on the task of finding a new investor to replace Williams Cos. The company had an agreement with its banks and roughly one-third of its public bondholders to pay down the banks by $150 million, draw up new credit documents covering the outstanding balance, and give the bondholders and Williams Cos. a pro-rata share of the new company. Also, it was agreed that, as a less drastic measure given the Williams Communications' robust prognosis, only the holding company would enter Chapter 11, leaving the operating company out of bankruptcy and all its customers unaffected.
And so the company met its first deadline and filed for Chapter 11 on April 22, 364 days after the parent company spun off Williams Communications Group. Had it filed a day later, the bondholders and other creditors would have had no right to seek redress against the parent. A bankruptcy court can reach back one year to void or restructure transactions to benefit the constituents of a company, but beyond 365 days little can be done.
The company now faced a second deadline. The banks decreed that bankruptcy proceedings had to conclude by October 15. Explains Mr. Lauria: "The banks had liens on the operating subsidiary. If, and only if, the reorganization could be accomplished by October 15, they would not exercise these rights and force the operating company into bankruptcy."
Williams Communications and its advisors had roughly six months to get the job done.
The OK Corral
As in all restructurings, each group scrutinizes all the relevant documents and marshals arguments that will either preserve its position or enable it to leap over other constituents to a higher position on the food chain. "Every party is looking for reasons why their position is the strongest on the planet and why everybody else's is weaker," says Mr. Coleman.
The banks were in the strongest position through the whole process because, unusually enough, the company had enough cash on hand to cover all their claims. Says Mr. Coleman of The Blackstone Group: "Remember, all of the way through all of this, you had a group of banks that had in its possession cash collateral, and at any point the banks could seize that cash." Adds Thomas Lauria of White & Case, counsel to Williams Companies: "The banks knew they would get paid in full, regardless. They were the toughest group to get to move on the issues. They also had the least level of concern about whether the company lived or died."
The bondholders were poised to argue that substantial portions of the former parent's $2.3 billion in claims against the company should be treated as equity, relegating these claims to a lower class of credit, with recovery that much less likely. Under Section 105 of the bankruptcy code, "the court may issue any order, process, or judgment that is necessary or appropriate." Factors to be considered include: whether the debt took the form of notes or other named financial instruments; whether it had a fixed maturity date, schedule of payment and rate of interest; whether other financing was available and if a reasonable creditor would made the loan; whether the claims were subordinated to other creditors; and whether advances were used to acquire capital assets or for operating costs.
The central question before the court would have been whether or not an arms-length lender would have made similar loans, or whether the parent had inside knowledge of the borrower's finances and extended the credit to preserve its own equity interest. The bondholders told the court there might be grounds to recharacterize as equity the $1.4 billion in debt incurred from the bond guarantee. Williams Communications, they argued, "had no access to equity or debt markets at the time."
The bondholders said they were also suspicious of Williams Cos.' $753-million claim from the network lease purchase, arguing that the former parent should have issued equity rather than a note to avoid diluting other claims with bankruptcy allegedly imminent. Says Richard Wynne of Kirkland & Ellis: "We looked at thousands of documents and interviewed witnesses."
Meanwhile, Blackstone was running a full search for an investor, contacting both financial and strategic acquirers around the world, maintaining sales logs, entering into confidentiality agreements and starting negotiations with over 50 different potential buyers.
Yet another deadline loomed: July 15, 2001, when Williams Communications was obligated to make a $150-million payment to its banks, having already given them $200 million when it filed for Chapter 11. "We had to decide how comfortable we were with the process of finding an investor," Mr. Coleman recalls. "Because if we weren't comfortable, then the idea that we would actually go ahead and pay this money out might not be a good one. We felt, along with the board and management, that the process was going well. We had enough interested parties and potential deals on the table to go forward."
Yet Another Crisis
By the late summer of 2002, Leucadia National Corp., a New York investment group, was the clear front-runner. The New York investor group had approached Williams Cos. in the spring seeking to buy its claims, which it would then be in a position to convert to equity. "We were in the midst of lengthy negotiations with them on the terms of that sale," recalls White & Case's Mr. Lauria. "That conversation expanded to include a discussion of terms on which the bondholders would release their claims as well so that there would be no prospect of litigation for the new company over historical issues."
Then, just as things were going so well yet again, the company's most important asset-its twenty-year exclusive supply contract to one of the country's largest telecom companies-looked set to disintegrate. SBC proclaimed that the spin-off constituted a change in control of Williams communications that triggered SBC's right to renegotiate its contract. "We were all thinking, `Gee, this will be one of the most effective Chapter 11s ever. Jobs aren't going to be lost, a good company is not going to go under, and it's all proceeding so quickly,'" recalls Mickey Pohl of Jones Day's Pittsburgh office. "Then it looked like SBC would change everything."
SBC had a representative on the board of Williams Cos., who had voted for the spin-off some eighteen months before. "There is plenty of law that says you can't complain about some-thing that you helped bring about," says Mr. Pohl. But SBC was alleging that their director knew nothing about the spin-off and that his vote came at the first meeting of the board that he had ever attended. "We had all kinds of e-mails and records to show that this was not his first meeting and that the director was fully briefed," recalls Mr. Pohl.
Corinne Ball and her team had prepared a draft settlement as part of the nascent plan of reorganization, which they put before the judge. As part of his ruling, Judge Lifland declared that the SBC contract was a core asset of the company, that the fate of that contract was essential to any reorganization, and that SBC itself was a key party to the proceedings. Typically, directors and officers are released from any liability in such a reorganization. Significantly, Corinne Ball and her team specifically excluded SBC's representative on the Williams Communications board from this protection. Asks Mr. Pohl: "Why should SBC have it both ways?" Adds Ms Ball: "SBC did not contest the facts, nor did it appeal the judge's order."
Next, Ms Ball asked the judge for a temporary restraining order barring SBC from rescinding the contract. Judge Lifland granted her motion without notice to SBC. "This was not an uncommon order-to preserve the status quo," says Mr. Pohl. "Also, had SBC been given notice and word had leaked to the Street, in bankruptcy court this would have been like crying `Fire!' in a crowded theater."
Both sides raced to prepare for the hearing on the TRO, which is required to be held within ten days of the order. Ms Ball called Mr. Pohl and they assembled a large litigation team. "We worked twenty hours a day for over a week getting ready for that hearing," says Mr. Pohl. "It was going to be a ten-billion-dollar day." That was what the SBC contract was worth over the rest of its life.
On the day of the hearing, there was standing room only in the courtroom, where Jones Day had its screens and projectors ready. Judge Lifland received both sides in chambers. SBC argued strenuously that its director should be protected under the plan of reorganization as were all the other directors. Ms Ball pointed out that SBC had not appealed the judge's order from the first hearing. She also insisted that SBC was arguing a contradiction: they were important enough to deserve to be released from future liability but not important enough to be prevented from rescinding the company' main asset. The fact that they were appearing in court arguing for protection only revealed the paradox they were trying to straddle. "It was like karate," she recalls. "We turned the force of their attack back on them."
The judge said he had decided to proceed by direct examination, which meant that witnesses' testimony would be read into the record and then each would submit to cross-examination. The judge then virtually dispensed with SBC's main argument. He told them, according to Mr. Pohl, not to spend too much time on the issue of jurisdiction. "I'm sure I have jurisdiction," he said flatly. "Is there any chance this can be resolved by agreement?" The answer was no. For now.
In the courtroom, Mr. Pohl stood up, ready to start his opening statement. "May I begin, Your Honor?" That would turn out to be the only sentence on the record.
The judge looked down from the bench, and said, "Where is your adversary?" SBC and its team were huddled in the hallway. "Go out and tell them we're ready to start." When they came in, SBC said it was willing to begin settlement discussions. Says Mr. Pohl: "Opening statements are a wake-up call for everyone."
The Jones Day lawyers said they would agree to a fifteen-minute meeting in the jury room but that they were not prepared to be delayed for no purpose. The talks lasted longer than fifteen minutes, Mr. Pohl recalls, and the judge announced that the hearing would begin after a lunch recess. The two sides needed more time, so the Williams Communications team agreed to bump the hearing forward a week. The temporary restraining order remained in place.
"We cleaned their clock," says Ms. Ball. "They agreed to the entry of the preliminary injunction barring rescission of their contract, and agreed to a settlement."
The Final Cliff-hanger
At last, the whole deal had been assembled.  Then the Federal Trade Commission stepped in. Would the delicate arrangements all collapse yet again?
The feds declared that the reorganization of Williams Communications constituted a change of control and their approval was required for all FTC licenses to be transferred to the new company. "There was much finger pointing as to who had dropped the ball," recalls Mr. Lauria of White & Case. "We concocted an arrangement under which the deal would close, with all Leucadia's money in escrow. Leucadia and the bondholders would each get their equity, and if the licenses were not granted, the money would go back to Leucadia and we would get their equity."
Fortunately for all concerned, the FTC granted the licenses during Thanksgiving week. As it now stands, the unsecured creditors own roughly 54 percent of the equity of the newly reorganized company. Leucadia has invested $150 million in the company, in addition to paying $180 million to purchase the claims of the former parent, and owns 44 percent of the equity. Under the plan of reorganization, there is a channeling injunction, which could allow holders of securities-related claims up to two percent of the equity of the reorganized company and potential recovery from the company's officer and director liability insurance policies. There are nine directors on the board, four selected by the committee of unsecured creditors, four by Leucadia, and one director who is also the CEO. The company will change its name to WilTel Communications Group Inc.
It now has only $375 million in bank debt. The final vote was as follows:
Class 2-pre-petition secured claims (the banks): holders of $652.5 million in claims voted approve; zero voted to reject, out of $725 million total claims.
Class 4-Williams Cos. assigned claims: $2.36 billion voted to approve; zero voted to reject, out of $2.36 billion eligible to vote.
Class 5-senior redeemable notes (bond holders): $2.15 billion voted to approve; $24.5 million voted to reject, out of $2.36 billion eligible to vote.
Class 6-other unsecured claims: $13 million voted to accept; zero voted to reject.
"This whole thing was such a soap opera," says an advisor who worked on the deal from beginning to end. "We had so many meetings that would end with everybody saying, `F-you,' and retreating to their corners and then starting again in the morning. But after much saber rattling, it's pretty amazing that in six months, the parties were able to reach a global agreement that solved all these problems."
The Players
Jones Day
Counsel to Williams Communications Group
Corrinne Ball
Erica Ryland
Marilyn Sonnie
The Blackstone Group
Advisors to Williams Communications Group
Timothy Coleman
Michael Hoffman
White & Case
Counsel to Williams Cos.
Thomas Lauria
Kirkland & Ellis
Counsel to Creditors Committee
Richard Wynne
Michael Kerr
Houlihan Lokey
Advisors to Creditors Committee
Irwin N. Gold
Christopher DeMauro
Schulte Roth & Zabel
Counsel to Leucadia
Michael Cook
David Rosewater
Weil, Gotshal & Manges
Counsel to SBC
Jeffrey Tannenbaum
Martin Sosland
Lazard Fréres & Co.
Advisors to SBC
James Millstein
Clifford Chance Rogers & Wells
Counsel to lenders
Margot Schonholtz
David Sullivan
FTI Consulting (formerly known as PWC Corporate Recovery)
Advisors to lenders
Carlyn Taylor
This article has been reprinted with permission from The M & A Journal, Vol.3, No.10. © 2003.