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VOL. 122 | NO. 116 | Friday, June 22, 2007

Memphis Networx: From Smart Money to Risky Business

By Andy Meek

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END OF STORY: Former Memphis Networx president Mark Ivie was employed by the telecom company for much of its eight-year existence. He left the company in mid-2006, and later that year its board began the process of selling it. -- Photo By Andy Meek

Memphis, Light, Gas & Water (MLGW) board members have postponed until July voting on the sale of telecom company Memphis Networx.

A clearer picture of how the MLGW spin-off got to this point is beginning to emerge.

The day after Memphis City Council member Edmund Ford was arrested last December on federal bribery charges, MLGW executives feared a long-running problem was about to get worse.

Alonzo Weaver, vice president of customer operations for the utility company, was so concerned that the arrest would put a new wrinkle in collecting Ford's large, unpaid debt to the company that on the day after the arrest, Weaver briefed Ford's bosses on the problem.

Meanwhile, in a conference room at the Bartlett headquarters of MLGW's telecommunications division some two weeks later, executives there were presented with a not-yet-public report by a Washington-based investment banking group.

At the time, a public furor was raging over the perception that MLGW, the largest three-service public utility in the country, had shown favoritism to powerful Memphians, including Ford. It was in that climate that utility executives also began quietly setting in motion the sale of Memphis Networx, a failed telecom investment almost eight years and $28 million in the making.


The rest of the story

It's now been more than a week since MLGW announced that the directors of Memphis Networx had agreed to unload it for $11.5 million to a Colorado-based holding company. But judging from the reaction at a Memphis City Council committee meeting this week, the general mood seems to be this: Somebody's still got some explaining to do.

"Assuming (the MLGW board) OKs the sale, it will then go to the Tennessee Regulatory Authority (TRA)," said MLGW spokesman Chris Stanley. "It is up to TRA's timeframe after our board's approval."

"The Networx board recommended selling Networx at this time because it was believed that a public/private partnership was an impediment to securing additional capital and that we needed to be honest with ourselves and the respective partners as to what the market value was."
- Nick Clark
Memphis Light, Gas & Water Division board member

The telecom venture's board in December hired the McLean Group to explore the possibility of a sale. While it wasn't immediately related to the Ford billing scandal unfolding at the same time, the unfavorable public attention focused on MLGW surely couldn't have been far from the minds of board members.

The Networx board consisted of three representatives from MLGW and three representatives from the group of private-sector investors that helped finance the company.

On behalf of Networx, about 50 firms were contacted last winter about buying the venture. Qualifications of each company were studied in a hurry, and the list was whittled down to 10 potential bidders. All 10 signed non-disclosure agreements.

Of those 10, eight submitted bids to purchase Networx. Three bids were chosen to evaluate further. Communications Infrastructure Investments, the winning bidder, made the highest offer.


In a hurry

Time apparently was of the essence. In an internal memo, MLGW board member Nick Clark wrote last week that Networx's business value was tanking fast when he joined the utility's board of directors more than two years ago.

"The Networx board recommended selling Networx at this time because it was believed that a public/private partnership was an impediment to securing additional capital and that we needed to be honest with ourselves and the respective partners as to what the market value was," he said.

Earlier this week, several document dumps from Clark wound up in the e-mail inboxes of local media representatives, with the documents including - released for the first time - Networx's annual reports covering each year since its inception.

They showed that the Networx venture - the goal of which was to build a county-wide network for telecom users - was not just broke. Even short-term financing wouldn't help bridge a looming financial chasm.

This, from a business that approached the Memphis City Council two years ago hoping to keep its spigot of public funding turned on and forecasting that the venture would finally break even that year.


Unsettling news

In reality, around the time Memphis Networx's former CEO Mark Ivie met with City Council members in early 2005 to ask for that new round of public financing for the company, a consultant hired to perform a fair market valuation of Networx came back with some unpleasant news.

Moreover, it was news that council members apparently weren't made aware.

The consultant, Doug Dawson - president of CCG Consulting Inc. - found that Networx, at least at the time, was overstaffed, paid exorbitant salaries, and had more overhead than necessary. Dawson, in an April 2005 letter, went on to describe his belief that the company had overvalued itself by about $5 million and was aggressively over-budgeting.

"My first observation of the company is that there is too much staffing," Dawson wrote. "The company has 18 positions slotted on the organization chart, although I understand a few of these are unfilled.

"I took exception to the company's future forecast. The way the forecast was described to me is that the company made its best guess as to the future and then tweaked the model higher to get the value they desired."

Even though companies in the same boat as Networx generally operate on thin profit margins, Dawson went on, the fledgling telecom venture nevertheless rewarded its executives with fat paychecks and bonuses.

"Wholesale companies in any industry by definition live on slim margins," he wrote. "This is generally why you see wholesale companies in warehouse districts where rents are low. Wholesale companies typically pay low salaries all around - it's the nature of being wholesale ... and Memphis Networx pays about the highest commissions I have ever seen anywhere."

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