Expanding carrier gets $1 billion infusion

N.Y. firm buys 12% of company building fiber-optic network

Telecommunications

August 31, 1999|By BLOOMBERG NEWS

NEW YORK -- Forstmann Little & Co., a New York buyout company, said yesterday that it will invest $1 billion for a 12 percent stake in McLeodUSA Inc., allowing the provider of local and long-distance phone services to expand its fiber-optic network in Midwestern and Rocky Mountain states.

Forstmann Little, led by billionaire financier Theodore Forstmann, will receive McLeodUSA preferred shares that are convertible into common stock at $36.50 each in five years. McLeodUSA, of Cedar Rapids, Iowa, may buy back the securities, which pay interest at 3.5 percent annually, after seven years.

Shares of McLeodUSA rose $1.125 to close at $32.75. The stock has more than doubled this year.

McLeodUSA said the investment will speed development of its 8,500-mile network and let it introduce services to better compete against the large regional phone companies such as U S West Inc. and Ameritech Corp. McLeodUSA and other fast-growing phone companies need billions of dollars to build networks to handle soaring demand for voice, data and Internet services.

"This is a tremendous shot in the arm for McLeodUSA," said analyst James Henry of Bear Stearns & Co. "This investment fully funds the company's current business plan."

Forstmann, a senior partner at Forstmann Little, will join McLeod-USA's board, with a second Forstmann Little partner to be named to the board within 30 days.

Forstmann made his fortune buying and selling companies. Forstmann Little has invested more than $13 billion in 24 acquisitions since its founding in 1978.

In May, Forstmann Little agreed to sell Gulfstream Aerospace Corp. to General Dynamics Corp. for $5.18 billion. The firm stands to make a 14-fold profit of $2.5 billion from the Gulfstream sale.

McLeodUSA is a competitive local exchange carrier, a phone company working to take market share from larger local telephone companies.

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