CoreExpress Hopes for Soft Landing in Acquisition

Troubled managed bandwidth venture CoreExpress could be preparing for a soft landing this week: A large network operator has made an offer to take over the company, people familiar with the situation say.

Troubled managed bandwidth venture CoreExpress could be preparing for a soft landing this week: A large network operator has made an offer to take over the company, people familiar with the situation say.

Those sources are keeping the name of the potential buyer secret, although potential candidates include Enron Communications, Level 3 Communications and Williams Communications. CoreExpress has long-term fiber leasing deals with Level 3 and Williams.

CoreExpress Extranet - which has about 100 signed customers, including Magellan Health Services, ONI Systems and Paymentech - is reportedly driving the deal. The transaction is imminent, since CoreExpress is scheduled to make a substantial payment on its bond debt by the end of October, and missing this payment could lead to the companys bankruptcy. CoreExpress execs say making this payment is out of question.

"We are so past [meeting the covenants] at this point - we are at the process of winding down the company," said CoreExpress legal counsel Lawrence Strickling, who is a former chief of the Federal Communications Commission Common Carrier Bureau. "We have a bid in hand for the assets of the company that we are trying to bring to conclusion, and well try to work through all the creditor issues to effect the sale."

If a sale does go through, CoreExpress flagship service, which enables enterprise customers to put mission-critical traffic on Internet pipes as opposed to frame relay, ATM or private-line connections, could be rebranded and used as a competitive weapon against virtual private networks, which cant provide similar end-to-end performance guarantees. It could also be a precursor to quality-of-service parameters becoming standard in the large carrier environment, which could enable a new level of barter, or peering deals, where larger carriers could exchange QOS-enabled traffic differently from regular IP data traffic.

However, it remains to be seen if CoreExpress Extranet will continue to operate, or whether the service would be recast as a different offering re-released later. Large operators are so far cautious in forecasting when services with end-to-end QOS guarantees will be available.

After his presentation at Kaufman Bros. Emerging Communications Conference in New York last week, Williams Chief Financial Officer Scott Shubert was vague about whether network-independent QOS services make sense.

"The easy answer to this question is, Yes, " Schubert said. "But it is not a tomorrow deliverable."

What Next, Then?

If the rumored sale doesnt go through, CoreExpress is likely to collapse under the weight of heavy debt and the failure of a major business unit. Late last year, under the direction of then-CEO Mike Gaddis, CoreExpress decided to get into the raw bandwidth business and sunk nearly $300 million into debt activating all of the dark fiber capacity it had leased for future expansion.

The strategy was a colossal flop, with no customers showing up to buy raw bandwidth. They did turn up to buy the CoreExpress Extranet service, but the numbers just dont add up: Extranet doesnt consume nearly as much bandwidth as CoreExpress is keeping lit and the company is bleeding capital to maintain it. The company is utilizing less than 10 percent of its available capacity.

In light of this costly mistake, CoreExpress began restructuring last summer. Gaddis resigned and was replaced by Ian Brown, former senior vice president in charge of sales and de-facto leader of the Extranet project.

CoreExpress laid off 60 percent of the work force in July, and has continued to cut employees. The news is stunning, given the pedigree of the companys backers - CoreExpress raised about $700 million from investors, including Benchmark Capital and Morgan Stanley Dean Witter. Roughly two-thirds of the funding came from vendors, including Cisco Systems and Nortel Networks.

The original business plan for CoreExpress was to deliver QOS guarantees for traffic that travels via several networks, a service that no single carrier delivers now. With such service active and commercially viable, CoreExpress doesnt have any real competitors. It has also been successful selling Extranet services in conjunction with applications, like videoconferencing.

"I think we validated the IP product: We have good customer acceptance, we demonstrated it works technically and, in my mind, its a real shame we werent given a chance to do it as a stand-alone business," Strickling said. "Our problem was that having built a $300 million fiber-optic backbone, we hoped we would lay off some extra capacity to other carriers and that just never materialized. We sunk under the weight of the backbone."