smittyUnlike most other telco companies, MFNX does not deal in long-haul fiber. MFNX is metro-area fiber only, and they have very little competition there.Most astute of you and also shows the ignorance of what some people believe MFNX provides. They lay no fiber and are actually the provider of last mile. They provide dark fiber bandwidth to ISP's and large scale customers. From Smith BarneyAs MFNX is approaching its extended deadline for closing its $350 millionbank debt facility and has not yet closed the deal, we assume that there is apossibility that the full amount of the bank debt is not available. Theinitial commitment letter was signed in January and the deadline has alreadybeen extended once from May 15, 2001 to June 30, 2001. While we believe itspossible that the deadline could be extended a second time, we feel that wemust assume that there is a reason why the deal has not yet closed and thatthe possibility exists that the entire $350 million may not be available atthis time. The obvious delay in getting the bank facility and the likelyalternatives including some equity and/or equity-linked transactions clearlyhas to be viewed as more dilutive to equity holders than a straight bankfacility. Any possible dilution to our price target from an equity orequity-linked deal would be dependent on the nature of the deal struck.Thus, while we will have to wait and analyze the consequences for equityholders at the time of an alternative financingannouncement, we think its prudent to lower our price target to $10 from $15at this time.We believe that MFNX does have other options for financing if they cannotclose this entire bank facility including funding from company insidersand/or strategic investors as well potential vendor financing, but potentialalternatives could include equity infusions which dilute equity investorscausing us to become more cautious on the equity shares. While we continueto believe that $350 million will fully-fund MFNX under its current plan(assuming they meet all of their numbers), we feel that the company would beprudent to raise up to $450 million in order to have a cushion on its fully-funded status. We believe this makes sense given the dot.com implosion andMFNX's exposure to internet infrastructure revenue streams includingcolocation and data center build-out.Since we could not possibly know at this time the nature or terms of anypotential alternative financing MFNX could potentially agree to, we arelowering our price target to $10 from $15 assuming some dilution frompotential equity or equity-linked financing as well as to be moreconservative with the stock trading at roughly $2 per share. For example, ifMFNX had to issue $200 million of equity at $2 per share they would beissuing 100 million new shares which would dilute our DCF-driven target priceby roughly $3 per share. Our post-financing price target will depend on theterms of alternative equity or equity-linked financing which would be moreonerous on a post-dilution basis than obviously a straight bank facilitywould be.We continue to believe that MFNX has a unique set of attractive local fiberassets and net PP&E of $3.5 billion that is well above its debt loadincluding out of the money convertible preferreds, (as of 3/31/01 MFNX has$1.6 billion in debt and a $975 million convertible preferred to Verizon).MFNX's competitive position as a provider of dense metro fiber and litservices has improved recently given that none of the potential "look-alike"private companies have received financing. Unlike the long-haul market wherethere is no market for selling dark fiber, the metro market still has end-users and carriers buying dark fiber to connect buildings and extend LANs viagigabit ethernet or private lines. Metro is a short-distance distributionbusiness (where as long-haul is a transport business) and visibility remainsgood for selling dark fiber in the local loop making MFNX an attractiveinvestment.The problem is that we believe several commercial banks are probably full ontelecom debt in general since telecom has a perceived increase in riskassociated with it given the recent post-internet bubble defaults in thetelecom/technology space. Furthermore, other companies with colocation anddata center exposure such as Exodus and Level3 have recently lowered guidancecreating a cloud over the sector which obviously does not help.LIQUIDITY ANALYSISWe have outlined the liquidity analysis for MFNX for the next 2 years below.As our table suggests, MFNX needs to shore up its financing by the end of theyear. However, with its current cash position of $554 million at the end of1Q01, MFNX is not currently in jeopardy of missing an interest payment or notmaking payroll. MFNX's quarterly burn rate is roughly $175 million perquarter, so its current cash position would last until the end of the yearbut of course MFNX would not be able to wait until the last minute to raisecapital so the company needs to shore up financing by the fourth quarter ofthis year.Our model assumes a $350 million capital infusion during 2001 which leavesthe company with $376 million at the end of 2001 which does fully-fund thecompany under its current plan. Our model shows MFNX with a cash position of$55 million at the end of 2003, which is why we said earlier in this notethat we would rather see new financing of $450 million vs. $350 million togive MFNX a bigger cushion on its fully-funded status.
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