BREAKFAST WITH THE FOOL
Monday, August 30, 1999
"If you hear that everybody is buying a certain stock, ask who is selling."
-- James Dines
McLeodUSA Gets $1 Billion Infusion
Brian Graney (TMF Panic)
Confirming a report in this morning's Wall Street Journal, private investment firm Forstmann Little & Co. has agreed to invest $1 billion in Cedar Rapids, Iowa-based competitive local exchange carrier (CLEC) McLeodUSA (Nasdaq: MCLD). Under the deal, Forstmann Little will buy convertible preferred shares representing a 12% stake in the company, which had needed a capital infusion to fully fund its business plan. In return, Forstmann Little senior partner Ted Forstmann and another partner plan to join the company's board.
In its latest 10-K filing with the SEC, McLeodUSA estimated it needed $1.4 billion through 2001 to fund its planned capital expenditures and operating expenses. Major initiatives include building out its currently 8,500 route mile fiber-optic network, expanding its current operations in 11 Midwest and Rocky Mountain states to include ten new states, and developing wireless services. If all goes according to plan, the company will be able to provide its residential and small- and medium-sized business customers one-stop communications shopping, offering local, long distance, Internet access, data, voice mail, paging, and PCS services all from a single provider and integrated into one monthly bill.
Forstmann said the investment is "in the right industry, at that right time, and with a highly talented team." The statement emphasizes his viewpoint that McLeodUSA is on the right track and its integrated model will allow it to compete effectively with the likes of regional powers US West (NYSE: USW) and Ameritech (NYSE: AIT). The payoff might take a while, however, as the company expects to be unprofitable for some time to come. Net losses have been growing at a substantial rate over the last four years and hit $124.9 million in 1998. The longer investment time frame sets the McLeodUSA investment apart from Forstmann Little stakes in Ziff-Davis (NYSE: ZD) and Gulfstream Aerospace (NYSE: GAC) earlier this decade, both of which were converted into big gains after roughly similar two- to three-year time periods.
News to Go
French retailers Carrefour and Promodes have agreed to merge in a $17 billion deal that will create Europe's largest retailer. Many observers consider the move a pre-emptive measure to fend off future competition from U.S. mega-retailer Wal-Mart (NYSE: WMT), which is expanding aggressively in Europe.
Commercial and industrial insurance underwriter American International Group (NYSE: AIG) announced a plan to buy back up to 10 million shares, or less than 1% of its total shares outstanding.
Biotechnology company Coulter Pharmaceutical (Nasdaq: CLTR) and marketing partner SmithKline Beecham (NYSE: SBH) said the FDA has requested additional analyses of certain data before it will approve Coulter's Biologics License Application (BLA) for its Bexxar treatment for certain cases of non-Hodgkins lymphoma.
Auto insurer Progressive Corp. (NYSE: PGR) warned that its third quarter earnings will fall below the current First Call mean estimate of $1.46 per share due to higher claims and recent price cuts. However, the company maintained that its fundamental business is strong.
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