Get Off of McLeod

Shares of McLeodUSA (MCLD) 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 (Q) and Verizon Communications (VZ) are involved in an animated bidding war for MCI (MCIP). Earlier Thursday, Qwest sweetened the cash portion of its $26-a-share acquisition offer for the former WorldCom. On Jan. 30, SBC Communications (SBC) agreed to purchase AT&T (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."