Hawaiian Telcom Communications Inc. filed for bankruptcy protection Monday, a black eye for buyout firm Carlyle Group and for private-equity investing.
Carlyle bought Hawaii's largest telephone carrier from Verizon in 2005 for $1.6 billion. Before it was absorbed by Verizon, the phone company was part of GTE.
Carlyle put up $425 million in equity and used debt to finance the rest. Carlyle filled the board with telecom experts, but Carlyle faced problems from the start. State utility regulators delayed the deal's closing. Billing and customer-service issues plagued Hawaiian Telcom as it created back-office systems from scratch. That spurred customers to drop service for wireless and cable providers.
In the third quarter, Hawaiian Telcom's revenue declined 6.7% to $112.3 million, and its loss widened to $34.7 million, the company's third consecutive quarterly loss.
Of the 109 U.S. companies that have filed for bankruptcy this year with assets of $1 million or more, 67 have been owned by buyout shops or been spun off by them.
From 2005 through the third quarter of 2008, private-equity firms added $741 billion of debt on company balance sheets. In stable economic times, that debt load may have been manageable. But in the midst of a brutal economic downturn, many firms can't withstand the added expense.
Such was the case of Hawaiian Telecom, which in the nine months ended in September paid $68.2 million in interest expenses, on top of a $35.7 million operating loss. (info from The Wall Street Journal)
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Sounds to me like Carlyle paid too much for the telco. I admit I'm not a business major (Computer Sci.), nor do I have much in the way of business experience. But, from your writeup, it sounds to me like that telecom company was on shaky ground to begin with if it was that close to bankruptcy.
I think Carlyle would have been better off paying 1 Billion, and using the 500 Million difference to pay off debts and cover operating expenses for a couple of years, to give them time to turn the company around. I mean, turning a company around in less than a year sounds to my untrained ears like a Herculean endeavor, so it seems like they got into the business without sufficient money available to allow them to lose some money for a year while they got things turned around.
I don't think there's anything fundamentally wrong with the telecom business, they just weren't in a position to outlast their losses.
So, what happens now? Are they entering a re-organization, or a liquidation?
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