Share price as of Wednesday's close:

39 cents

Share price now:

21 cents

Change:

-46%

Volume:

39.1 million shares, daily average 4.4 million shares

Last time this low:

All-time low

52-week high:

$1.61

52-week low:

23 cents

A FORMER TELECOM HIGHFLIER

is putting itself on the auction block, but some observers wonder whether any bidders will bother to show up.

Shares of McLeodUSA plunged 46% to 21 cents Thursday after the communications-services provider announced it would put itself up for sale. Absent a buyer or a successful restructuring of its debt, the Cedar Rapids, Iowa, company warned it might be forced to seek protection from creditors. McLeod has already been through one bankruptcy from which it emerged in 2002. With a market capitalization of just $64 million, the company's stock has fallen 90% from its post-bankruptcy high of $2.20 on Jan. 21, 2004.

"To me, McLeod's current business, its size, market share and presence in the industry are insignificant," says Ivan Feinseth, director of research at Matrix USA, a New York brokerage. "At this point, I don't see them even registering on anyone's radar screen, let alone as an acquisition candidate."

McLeod's latest financial results, released late Wednesday, likely won't spur buyers to line up for a shot at gaining control of the struggling company. The fourth-quarter loss from continuing operations was $98.1 million, or 32 cents a share, wider than the $56.6 million, or 20 cents, lost a year earlier. The company's adjusted earnings before interest, taxes, depreciation and amortization, a cash-flow measure known as Ebitda, was $14.1 million, better than the third quarter's $11.5 million, but below the $16.5 million reported for the fourth quarter of 2003. Revenues fell 5% sequentially and 22% year-over-year to $162.6 million. The company expects that sales will continue to slide as larger, better-known rivals become even more competitive.

A provider of telecom services in 25 states in the Midwest and West, McLeod was prompted to search for a suitor by the recent merger activity in the industry. Qwest Communications International and Verizon Communications are involved in an animated bidding war for MCI. Earlier Thursday, Qwest sweetened the cash portion of its $26-a-share acquisition offer for the former WorldCom. On Jan. 30, SBC Communications agreed to purchase AT&T in a $16 billion deal.

But McLeod has much less to offer than AT&T or MCI. As of Dec. 31, McLeod reported long-term debt of $727.8 million plus current maturities of $49.5 million. It ended the year in compliance with all financial covenants and $50 million in cash. However, the cash balance was down to $45 million by March 15, and the company had to convince lenders not to take action before May 23 related to any missed debt payments. McLeod had been scheduled to make $18.1 million in principal and interest payments by March 31.

That's a lot of baggage for many potential bidders, say analysts, though geography could play a role in attracting the right buyer.

"One of the reasons Verizon is buying MCI and SBC is buying AT&T is to buy out of their regions," says Lisa Pierce, a telecom analyst at Forrester Research, a market research firm in Cambridge, Mass. "McLeod is concentrated in the Midwest, so it would be purchased by a company that has a hole in its footprint there."

According to Pierce, McLeod provides telecom services mostly to smaller cities. As such, the company might appeal to a bigger outfit like

BellSouth

Sprint

"Still, I'm of the opinion that it might be very hard to find a buyer," says Pierce. "This is not the best time to put yourself up for sale. With the industry's crash and burn, these companies aren't worth very much." (Pierce doesn't own shares of McLeodUSA; Forrester Research doesn't do investment banking.)

Raul Martynek, chief executive of Eureka Networks, a competitive local exchange carrier, or CLEC, in New York, has a different take on the role of geography in any potential deal.

"The people that will be interested will be other CLECs that have the same footprint as McLeod," says Martynek. "They will look at $200 million in revenue overlaid on their current network, which will generate $50 million in cash flow. People aren't all that profitable, so they won't expand their geographies if it won't add to the bottom line. If I'm running a profitable business in BellSouth's area, why would I want to acquire McLeod, which isn't doing well in the Midwest?"

CLECs took off after the Telecommunications Act of 1996 opened local phone markets to competition by forcing Baby Bells to lease network space to smaller competitors. However, a series of rulings in late 2004 by the Federal Communications Commission is curtailing CLECs' access Bell networks. The FCC moves are making it tough for most CLECs to thrive against bigger competitors.

"The regional bell operating companies' [Baby Bells] and cable companies' entry into traditional long distance has crushed whatever momentum the CLECs once had in the small-business and consumer markets," says Pete Wilson, vice chairman of Vercuity, a Denver telecom consulting firm. "My expectation is that the larger CLECs like McLeod will become acquisition candidates for the cable companies, such as Time Warner and Comcast, as they seek to strengthen their hand at telecommunications once the RBOCs digest the larger carriers like AT&T and MCI. Their networks and customer bases have value and could make a good beachhead for a major push into telephony, including [voice over Internet protocol] by the cable companies." (Wilson doesn't own shares of McLeodUSA; Vercuity doesn't do investment banking.)

Don't count the CLECs out of the running though. CLECs that might be interested in bulking up by acquiring McLeod, according to Eureka Networks' Martynek, include XO Communications, New York-based Call Choice and Minnesota-based Eschelon.

"XO is owned by Carl Ichan, and they are always looking at deals," says Martynek. "Someone with the same geography will buy them." (Martynek doesn't own shares of McLeodUSA; Eureka Networks doesn't do investment banking.)

Of course, a buyout firm or other deep-pocketed investors could also swoop in and gobble up McLeod.

"One private equity company is TDS," says Ragu Gurumurthy, head of technology practice at Adventis, a strategy consulting firm in Boston. "It's a holding company based in Chicago that has invested in U.S. Cellular and other CLECs. Providence Equity is another private equity fund. You could also see a distressed-asset hedge fund get interested in McLeod if they can buy the assets at 20 cents on the dollar. The third scenario could be BellSouth, but that's a distant third, just 5% potential." (Gurumurthy doesn't own shares of McLeodUSA; Adventis doesn't do investment banking.)

McLeod wouldn't comment on whether it's in talks with any potential buyers. But when and if one is found, McLeod's current shareholders shouldn't expect a big payday.

"While the company continues to explore a variety of options with a view toward maximizing value for all of its stakeholders, none of the options presented to date have suggested that there will be any meaningful recovery for the company's current preferred stock or common stock holders," said McLeod in its written statement. "Accordingly, it is unlikely that holders of the company's preferred stock or common stock will receive any recovery in a capital restructuring or other strategic transaction."

Quote:
"It's sad, but it looks like it's going to go to bankruptcy," says Matrix's Feinseth. "At this point, the industry doesn't have to grow by consolidation. It can grow by pricing power, economies of scale and the financial strength of the leaders. So, I don't think anyone will buy McLeod." (Feinseth doesn't own shares of McLeodUSA; Matrix USA doesn't have an investment-banking relationship with the company.)