Exodus Communications could file for Chapter 11 bankruptcy within the next two weeks, an industry analyst suggested in a research report released this morning.
The analyst, Andrew Schroepfer, president of Tier 1 Research, wrote that Exodus is expected to fire about 1,000 people; shut down or sell off data centers and stop competing for new business in an attempt to continue serving its existing customer base. As a result of a preplanned bankruptcy, bondholders might be able to get as much as 25 cents on the dollar. Exodus shares could continue trading through the proceedings, and even get a boost after the company is cleared of the bond debt.
"Exodus bondholders have formed a creditors committee, which means since there are so many holders of the bonds, it is much easier for the committee to interact with Exodus and work out an agreement rather than have thousands of people try to communicate their individual opinions," Schroepfer said.
The company currently has $340 million in cash reserves, according to Schroepfer. Why file for bankruptcy while there is still money in the bank?
"I think they lost their momentum in winning new business," Schroepfer said.
An Exodus spokesperson did not return calls requesting comments.
Exodus is seeking debtor-in-possession financing, which would let it pay off 20 cents to 25 cents on the dollar to bondholders, Schroepfer said. The layoffs Tier 1 is forecasting would come on top of a recent round of firings that culminated in the resignation of CEO Ellen Hancock earlier this month. Exoduss latest series of layoffs trimmed its ranks to fewer than 3,000 people. Schroepfer predicted the number could drop even more.
"Because they are going down below 2,000 employees, there is no way they could support the number of data centers they have out there. They can probably cut from 10 to 15 data centers and not lose more than 15 percent of their revenue base," he said.
Exoduss prospects after Chapter 11 could be either continuing independence on a smaller scale -- forget being the largest Web hoster in the world -- or acquisition. Tier 1 points to Electronic Data Systems as an ideal suitor. Other analysts also say not to rule out Global Crossing, which sells 50 percent of Exoduss bandwidth and owns a 20 percent stake in the company. Interactive Week reported the carrier explored the option of making Exodus its subsidiary earlier this year.
Analysts tracking Exodus were not surprised by the bankruptcy rumor, which has been circulating since the beginning of the year. In fact, a prepackaged bankruptcy deal aimed at wiping clean the bond debt slate has never been ruled out. But many in the financial analyst community dont think Exodus will seek Chapter 11.
"We do not currently believe Exodus will go bankrupt," said Cary Robinson, U.S. Bancorp Piper Jaffrays senior research analyst for communication services. "One thought, they could do a prepackaged bankruptcy/restructuring like what was done by Focal Communications. Focals restructuring reduced their debt burden, added capital to the company from external investors and kept the equity alive."
Exoduss next debt payment is on Dec. 15.