We can rebuild it

Interoute’s story is typical of our times. What is untypical is that the telecoms company is still with us. Group legal counsel Richard Hastings hopes that Interoute has a bright future, of course, but let’s face it, it could not be any worse than the recent past. The gloom that has killed off so many in this savaged sector engulfed the company for six months and placed it in receivership; it is only now that Interoute is emerging from the doldrums and again starting to dream of better days.

Hastings joined Interoute in February 2000 from Hammonds Suddards Edge (now Hammonds). He had worked for Alan Sugar – “an amazing character to work for” – at Amstrad for four years, culminating in being promoted to head of legal. He joined Hammonds as an associate in the IT/intellectual property (IP) department to gain a broader commercial experience.

Hastings was overjoyed to join Interoute, claiming in an earlier interview with The Lawyer: “I love my job. My life here is 100 per cent better.” And it stayed that way for a while. Hastings says he was sold a dream – but that dream was to become a nightmare.

Interoute was set up in 1995 by two former Cable & Wireless managers with a simple voice resale licence, challenging BT with cheaper phone calls overseas. It was the largest seller of phonecards in the UK and had similar businesses throughout Europe. In 1996 the company listed on AIM and attracted investment from the private Swiss organisation the Sandoz Family Foundation, the family behind pharmaceutical giant Novartis.

Sandoz invested more than e1.2bn (£814.6m) in Interoute to finance the construction of the I-21 network, an 18,000km fibreoptic network connecting 48 European cities. Alcatel was engaged to build the network – an uneasy relationship that would eventually almost sink the company. “They vendor-financed the network to the tune of £400m and therefore tied us in,” explains Hastings. “We had to take operation maintenance from them. We had to buy all the equipment from them. It was a very one-sided relationship.”

Hastings’ initial brief was to take control of the company’s legal affairs, oversee the building of the network and take the company public. Within a week of joining he jetted out to Switzerland to beauty parade investment banks and law firms.

Rowe & Maw (now Mayer Brown Rowe & Maw) had advised the company on its establishment and remains the company’s main law firm, but at the time the company’s bankers did not think the firm had the capability to advise on a £4bn-£8bn initial public offering (IPO).

It was while beauty parading for the IPO that Hastings first began to deal with Baker & McKenzie. He was astonished at the failings of magic circle firms and their apparent inability to understand the company and how to offer an integrated transatlantic service with the firms’ US partners. Baker & McKenzie now advises the firm throughout much of Europe and on telecoms issues in the UK, with Hastings singling out the expertise of partner Peter Strivens.

Unfortunately for Baker & McKenzie, having won the pitch to advise on the IPO, which was scheduled for the summer of 2000, in the end it never happened. “The market was dying around us,” says Hastings.

Having shelved the IPO, Hastings’ next task was to bring the legal function under his control. This was complicated by the company’s numerous subsidiaries across Europe. “It was a hard fight for a year. Sometimes through the chairman we’d issue a dictate that, if you instruct your own local lawyers, you’ll have to pay for them out of your own pocket,” he says. But it was nothing compared with the anguish to come.

Although the market was looking shaky, the company seemed to be doing well, with around 1,200 employees in Europe. Hastings had built up a legal team of eight lawyers, with six in the UK and two in Germany, and had been promoted to the board. The network was completed by summer 2002 and the company was ready to become a telecoms provider with one of the largest networks in Europe.

That same summer new chairman Jim Kinsella took over and, after a thorough review of the business, decided that things were not quite so rosy. “We looked at it and decided that the current business model was not viable,” states Hastings sombrely.

So the company, like so many in recent times, began what would become a painful restructuring process. The first stage was to get out of the traditional voice telecoms business. Initially, the company decided to close the business, but eventually managed to sell it on to Wavecrest. It was sold under auction in less than a month. Five-hundred employees departed and the company managed to offload the historical liabilities attached to the business.

Another 250 people were made redundant as the company tried to transform itself from a construction company to a telecoms provider. Repayments to Alcatel under the vendor financing agreement were due, but negotiations were proving difficult. “We told Alcatel we were very sorry, but that we wouldn’t repay them e550m (£373.3m),” Hastings states bluntly.

Alcatel had security over the whole network. It had a choice after being told that Interoute was defaulting under the agreement. “Alcatel could take the whole network and run it themselves, but they’d have to fund it and would be competing with too many of their customers. They’re a network supplier not a service provider,” says Hastings.

Interoute made an offer to pay off the debt. It was ignored. The company engaged Goldman Sachs as an independent party, to value the assets and see if anyone was interested in buying the network, which nobody was.

“As we didn’t get anywhere with Alcatel, we took the radical decision to put the company into administration. We thought the administrator, Chris Laverty of KPMG, would be able to tell Alcatel that nobody would buy the company. If the company was liquidated, Alcatel would get nothing. The alternative was Sandoz making them an offer,” says Hastings. “I was one of only four people at the company that knew what was going on. The chairman, vice-chairman, chief financial officer and myself were running this process. I didn’t sleep easily over that four-month period.”

Hastings almost visibly shudders and says: “The worst day of my career was the Tuesday morning when I was told that Deloitte & Touche were downstairs with their notice of receivership. We thought it was all over.

“What was remarkable was that the people at Deloittes who were appointed had no real knowledge of the telecoms industry.”

The receivers spent two weeks poring over the books, sacked the entire staff and tried to find ways of recovering Alcatel’s money. A handful of hardy Interoute souls stayed on to desperately negotiate with Alcatel and try to protect the interests of the shareholders.

Within a week Sandoz got directly involved and Deloittes realised that it could extract no financial gain from Interoute. On 13 December 2002, Sandoz agreed a deal to buy out Alcatel’s debt. “It was amazing. Three weeks later we had our company back,” says Hastings.

The last few months have been about rehiring staff and rebuilding confidence. The company is back up to 250 employees and Hastings has a team of three lawyers, reinforced with secondees from Baker & McKenzie and Simmons & Simmons. Hastings is also reviewing his outside counsel and trying to agree favourable fee arrangements with preferred firms.

Just last week the company signed a deal with Greek telecoms operator Hellenic Telecommunications Organisation to provide high-speed data network services across Europe in preparation for the 2004 Olympic Games in Athens. The deal seems almost symbolic of the struggles that Interoute has emerged from, but perhaps it could be the springboard for future success.
Richard Hastings
Group legal counsel
Organisation: Interoute
Sector: Telecoms
Turnover: Approximately £200m
Employees: 250
Legal capability: Three in the UK and one in Germany
Annual legal spend: £2m
Group legal counsel: Richard Hastings
Reporting to: Chairman Jim Kinsella
Main law firms: Arthur Russell (US), Baker & McKenzie (telecoms, France, Italy, Netherlands), Clyde & Co (litigation), Davenport Lyons (commercial), De Brauw Blackstone Westbroek (Netherlands), Freshfields Bruckhaus Deringer (Germany), Herbert Smith (France), Jones Day (Belgium), Masons (IT), Mayer Brown Rowe & Maw (corporate/commercial), Schoenherr Barfuss Torggler & Partners (Austria), Swindler Berlin Shereff Friedman (US), Travers Smith Braithwaite (Germany), Uría & Menéndez (Spain) and Walder Wyss & Partners (Switzerland)