IDT to Buy Winstar for About $40 Million

IDT Corp., a New Jersey telecom company, has offered to buy troubled Winstar Communications Inc. for about $40 million, Winstar's lawyers said Dec. 18. If approved by a bankruptcy judge, the deal would save Winstar, which has run out of funds to operate, from liquidation.


Lawyers Mark Shapiro of Shearman & Sterling, New York, and Pauline Morgan of Young Conway Stargatt & Taylor, Wilmington, Del., were scheduled to meet with U.S. District Judge Joseph Farnan Jr. to seek approval for the proposed deal.


"We believe we have a buyer," Morgan said. The judge's approval would assume no better deal is presented, among other conditions.


An IDT spokesman declined comment.


Winstar is based in New York, but its major presence is in Northern Virginia, where it employed at least 2,000 workers at its peak early this year before massive layoffs. Loaded down with more than $4 billion in debt, Winstar filed for bankruptcy April 18, two days after it failed to make a $75 million debt payment to telecom equipment maker Lucent.


The doomed-by-debt scenario of Winstar mirrors those of other Northern Virginia startup telecom companies, known as competitive local exchange carriers. XO Communications Inc. is planning to restructure its debt in a plan that would wipe out the stake of its common shareholders. Teligent Inc., Net2000 Communications Inc. and e.spire Communications Inc. all have filed for Chapter 11 reorganization, and only e.spire has plans to emerge.


Shapiro said IDT is offering either $38 million in cash, or $30 million in cash and about $12.5 million worth of IDT's stock "for substantially all of [Winstar's] assets." IDT would continue to operate Winstar's service, he said.


The lawyers were ready as of late Dec. 17 to ask Farnan to let Winstar liquidate. That announcement, to a packed courtroom of lawyers representing various interests in the case, came after no buyer approved by the court was found, and a hearing to close an auction for Winstar was canceled. Previous proposals by unidentified groups for Winstar reportedly did not meet proof of financing.


Morgan said Dec. 17 that Winstar's legal team would continue to work through the night to try to get a deal that the court would approve. The IDT proposal was announced to the courtroom around 7 p.m. and formally put on paper Dec. 18 at 5:30 a.m., Morgan and Shapiro said.


The acquisition, expected to close Dec. 19 if approved, caps an accelerated but haphazard sale of Winstar that started Nov. 21. At the time, the company asked the court to set up an expedited auction for Winstar to close Dec. 5 and be approved by Farnan Dec. 10, the day Winstar had projected it would run out of money, according to court documents.


But at the Dec. 10 hearing, the Federal Communications Commission appealed to Farnan to keep Winstar operating because major federal customers ? namely the Securities and Exchange Commission, the FBI and Defense Department ? could not face service interruptions.


Winstar holds 14 Metropolitan Area Acquisition contracts, which were awarded by the General Services Administration to provide local telecommunications services to government agencies in cities around the country. Winstar has won more MAA deals than any other telecom provider.


Farnan issued a weeklong restraining order against the services being shut down. On Dec. 17, he extended the order another day.


IDT's shareholders include John Malone's Liberty Media Group and AT&T Corp. Malone sold cable giant Tele-Communications Inc. to AT&T for $52 billion in 1998 and then bought a stake in IDT.


In July, IDT, which owns 37 percent of Teligent, backed out of a deal to purchase all of bankrupt Teligent. Two months earlier, just before Teligent filed for Chapter 11 protection, IDT acquired its stake in Teligent from Liberty Media and investment company Hicks, Muse Tate & Furst Inc.