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Caught in the downward spiral of telecom stocks, Covad Communications Group Inc. wants investors to know that the company is not a takeover target. In fact, says Richard Wong, vice-president for marketing at Covad, the company’s recent out-of-court settlement with SBC Communications Inc. not only resulted in $750 million in financing, but helped it sell $500 million in five-year convertible senior notes in September. “Those two deals were huge,” Wong said in a telephone interview from the company’s headquarters in Santa Clara, Calif. “SBC could have just paid us a settlement and walked away, but they saw enough in Covad to make a huge commitment for their future and ours.” Covad general counsel Jason Oxman said Covad had agreed to drop an antitrust suit against SBC that it filed in U.S. District Court in San Francisco in 1998. To settle the case, SBC agreed to buy a 6% stake in Covad for $150 million, and purchase $600 million worth of business over the next six years. With those commitments in hand, Covad was able to raise another $500 million by selling debt instruments. The suit alleged that San Antonio-based SBC had conspired to block Covad’s access to its local lines. Covad argued that SBC violated the 1996 Telecommunications Act’s mandate that former Baby Bells allow emerging telecom carriers access to the lines needed for high-speed Internet connections. “SBC saw the light and agreed to settle,” Oxman said. Covad’s legal team, based in Washington, D.C., has filed a similar suit against Verizon Communications. That suit is in the discovery phase in U.S. District Court in Washington. The SBC agreement put to rest litigation that was hanging over the two companies, and allowed SBC to avoid having to make a larger payment than the $27.2 million SBC subsidiary Pacific Bell was ordered in a separate case to make to Covad in March. That ruling determined that PacBell had failed to provide Covad with timely access to local telephone lines. “The settlement was very important for our DSL program,” said SBC spokesman Selim Bingol. “We eliminated the litigation issue and got a great partner who is able to build out our DSL service faster than we probably could have done it alone.” Coming at a time when the capital markets are choppy at best and in most cases completely closed, the SBC settlement assures that Covad is fully funded into the first quarter of 2002. According to James Henry, telecom analyst at Bear, Stearns & Co., Covad is sitting on about $1.3 billion in cash and debt of about $800 million. Internally, the company is installing about 1,200 DSL lines per day, an improvement over 800 a day at the beginning of June. Covad estimates it will be installing 1,450 DSL lines a day in 2001. “Right now, they’re firing on all cylinders,” Henry said. Now if only investors would feel the same say, added Wong. Although Covad is the recognized leader in the DSL sector controlling about 35% of the DSL business market, Covad has seen its stock fall 85.2% in the past eight months from its 52-week high of $66.625 a share. Ever since Covad’s top competitor, NorthPoint Communications Inc., was forced into a merger this summer with the incumbent Verizon, formerly Bell Atlantic Corp., rumors have circled that Covad would have to merge with a large telecom or risk falling deep into debt. Investors had assumed, Wong acknowledges, that DSL carriers are in a no-win situation because their business plans relies on cooperation with incumbent carriers such as SBC and Verizon. Although the incumbents are required by the ’96 Act to open their local access lines — the final connection to home or business — to competitor telecoms, they have regularly been cited for obstructing access. William Rouhana, chairman and CEO of Winstar Communications, one of a group of so-called emerging carriers that offers wireless connections to circumvent the incumbents, calls it “strategic incompetence.” But Wong says the SBC settlement has turned onetime competitors and protagonists into partners. Because of the litigation and Covad’s evolution into a national rather than just West Coast provider, relations with the incumbent carriers are steadily improving. “The best-performing company for us is PacBell, and that comes after the March ruling,” Wong said. “It does get better when you work with them over time.” Copyright (c)2000 TDD, LLC. All rights reserved.

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