KPNQwest could face Enron-style investigation

By Peter Judge, ZDNet.co.uk, 10 June, 2002 17:10

NEWS

Analysts are calling for an investigation into the business dealings of bankrupt network provider KPNQwest. "Jack (McMaster, KPNQwest chief executive) must have lied to the banks in March to get a credit facility," said Bert Siebrand, senior analyst, of technology and telecoms at SNS Securities. The company should be investigated by the US Securities and Exchange Commission (SEC), its Dutch equivalent the AFM, or the Ondernemmingskamer, a court which investigates business malpractice in the Netherlands, said Siebrand. "I can't imagine they will get away with this," he said. "It looks very much as if KPNQwest pumped up its EBITDA by booking income as revenue, that should not have been booked as revenue," said Siebrand. KPNQwest appeared to be profitable in February, gave a profit warning in April, and went bankrupt in May. EBITDA or "earnings before interest depreciation and amortisation" is, loosely speaking, a company's revenue. Deals between KPNQwest and its main shareholders must have exploited accounting rules so that both parties could report revenue from a single deal, said Siebrand. These so-called "hollow capacity swaps" have been criticised at other failed service providers such as Global Crossing. "It was a fantastic opportunity to exploit the US accounting rules," said Siebrand. "These people found a money machine, which would translate shareholder loans into revenues. No one could detect if these were real revenues." The US carrier Qwest and the Dutch telco KPN both took long-term capacity, in the form of 20-year licences, from their joint venture, KPNQwest, which booked all this money as revenue for 2001. "I believe that KPNQwest lied in January, and tried to assure us that these swaps were real revenue," said Siebrand. KPN has kept quiet about its dealings with KPNQwest, but since the crisis began, Qwest has stated that it is only spending $3m (£2m) a month for actual service from the KPNQwest network, implying an annual spend of $36m (£24m) with KPNQwest. Meanwhile KPNQwest's own accounts imply it was paid 240m euros (£155m) for "international services" from Qwest last year, said Siebrand. This implies that Qwest spent $187m (£131m) in exchange for for bandwidth it did not need, to boost KPNQwest's EBITDA. January's good figures were enough to convince banks to finance the purchase of bankrupt service provider Ebone. The management may not have believed in that business plan at all, suggests Siebrand, only taking over Ebone to get a credit facility and "last a bit longer". At this stage, "most analysts bought the pitch" from KPNQwest, according to Richard Webb, European analyst at Infonetics Research. Like most analysts, he is now dubious about the good figures he was given earlier this year. The timing of the failure suggests that the accountant Arthur Andersen may have been involved in sinking KPNQwest, whether or not it helped to artificially inflate previous years' figures, said Siebrand: "I assume that the shareholders in KPNQwest expected to get away with it again, but Arthur Andersen got different instructions this year." Jasper Koning of ZDNet.nl contributed to this article.

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