Proposed Telecom Merger Creates Static in Europe

Viatel Inc., a facilities-based telecom issuer that operates in European markets, is facing some tough times, according to high yield investors, although there may be a light at the end of the tunnel.

The company's outstanding high yield bonds fell about thee points last week, lagging the stock which has taken a nosedive to the high 20's from a 52-week high of $58.875 on July 13. The low point in the past 52 weeks came Oct. 8 at $6.875. And earlier this month, Standard & Poor's placed the company's debt on CreditWatch with negative implications.

The bad news largely stems from the company's announcement that it plans to buy Destia Communications. Even though the merger is the underlying cause of Viatel's woes, the telecom issuer needs the other company to add a customer base for its fiber optic network, sources said. Destia has about 500,000 customers, and many of them represent key new markets in Europe, analysts said last week.

However, it will indeed take longer for the merged company to be cash flow positive, which is the underlying reason for all the concern.

The slide in Viatel's stock price is very close to triggering a provision whereby Destia cold walk away from the deal, investors said. The company could not be reached for comment, but outside sources said that included in the deal is a clause that allows Destia to abandon the corporate marriage if Viatel's stock price falls below $25 per share.

And just to make things more complicated, there also are implications stemming from new accounting rules that took effect in June. Those rules oversee how companies account for revenues when they buy capacity, according to media analysts. And while it is not yet known just how it will impact the financials of specific companies, the uncertainty alone is beginning to make investors take notice.