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No. of Recommendations: 5

Unlike 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 Barney

As MFNX is approaching its extended deadline for closing its $350 million
bank debt facility and has not yet closed the deal, we assume that there is a
possibility that the full amount of the bank debt is not available. The
initial commitment letter was signed in January and the deadline has already
been extended once from May 15, 2001 to June 30, 2001. While we believe its
possible that the deadline could be extended a second time, we feel that we
must assume that there is a reason why the deal has not yet closed and that
the possibility exists that the entire $350 million may not be available at
this time. The obvious delay in getting the bank facility and the likely
alternatives including some equity and/or equity-linked transactions clearly
has to be viewed as more dilutive to equity holders than a straight bank
facility. Any possible dilution to our price target from an equity or
equity-linked deal would be dependent on the nature of the deal struck.
Thus, while we will have to wait and analyze the consequences for equity
holders at the time of an alternative financing
announcement, we think its prudent to lower our price target to $10 from $15
at this time.
We believe that MFNX does have other options for financing if they cannot
close this entire bank facility including funding from company insiders
and/or strategic investors as well potential vendor financing, but potential
alternatives could include equity infusions which dilute equity investors
causing us to become more cautious on the equity shares. While we continue
to 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 be
prudent to raise up to $450 million in order to have a cushion on its fully-
funded status. We believe this makes sense given the implosion and
MFNX's exposure to internet infrastructure revenue streams including
colocation and data center build-out.
Since we could not possibly know at this time the nature or terms of any
potential alternative financing MFNX could potentially agree to, we are
lowering our price target to $10 from $15 assuming some dilution from
potential equity or equity-linked financing as well as to be more
conservative with the stock trading at roughly $2 per share. For example, if
MFNX had to issue $200 million of equity at $2 per share they would be
issuing 100 million new shares which would dilute our DCF-driven target price
by roughly $3 per share. Our post-financing price target will depend on the
terms of alternative equity or equity-linked financing which would be more
onerous on a post-dilution basis than obviously a straight bank facility
would be.
We continue to believe that MFNX has a unique set of attractive local fiber
assets and net PP&E of $3.5 billion that is well above its debt load
including 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 lit
services has improved recently given that none of the potential "look-alike"
private companies have received financing. Unlike the long-haul market where
there 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 via
gigabit ethernet or private lines. Metro is a short-distance distribution
business (where as long-haul is a transport business) and visibility remains
good for selling dark fiber in the local loop making MFNX an attractive
The problem is that we believe several commercial banks are probably full on
telecom debt in general since telecom has a perceived increase in risk
associated with it given the recent post-internet bubble defaults in the
telecom/technology space. Furthermore, other companies with colocation and
data center exposure such as Exodus and Level3 have recently lowered guidance
creating a cloud over the sector which obviously does not help.
We 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 the
year. However, with its current cash position of $554 million at the end of
1Q01, MFNX is not currently in jeopardy of missing an interest payment or not
making payroll. MFNX's quarterly burn rate is roughly $175 million per
quarter, so its current cash position would last until the end of the year
but of course MFNX would not be able to wait until the last minute to raise
capital so the company needs to shore up financing by the fourth quarter of
this year.
Our model assumes a $350 million capital infusion during 2001 which leaves
the company with $376 million at the end of 2001 which does fully-fund the
company 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 note
that we would rather see new financing of $450 million vs. $350 million to
give MFNX a bigger cushion on its fully-funded status.

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