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Cash-Short Metromedia Finally Exhausts a Top Analyst's Patience

The stock peaked 16 months ago, but Salomon's Jack Grubman waited till Wednesday to change his buy rating.

There's shutting the gate after the horse has bolted. And then there's shutting the gate after the horse has bolted and broken its leg.

That may be the best way to characterize the downgrade that Salomon Smith Barney analyst and telecom industry phenomenon Jack Grubman issued for

Metromedia Fiber Network



Grubman's reluctant revision from buy to neutral comes long after many less wishful thinkers have given up on Metromedia, which operates fiber networks in major cities. The company, which Salomon brought public in October 1997, saw its shares plunge to 98 cents on Tuesday night from a 52-week high of $43, marking their first close below

Nasdaq's $1 delisting limbo bar. (Stocks must typically trade below $1 for a month at a time before the Nasdaq will start delisting proceedings.) On Wednesday, Metromedia stumbled a further 19 cents to close at 79 cents.

With the brokerage industry increasingly under fire from investors and regulators who question the independence of sell-side analysts, the timing of the downgrade is bound to raise eyebrows. And Grubman has been criticized in the past for appearing to fashion ratings to please possible investment banking clients. Grubman didn't respond to a request for comment.

Regrets, I've Had a Few

Grubman's move comes just days before the July 31 expiration of a commitment letter that the cash-burning Metromedia has in hand for a $350 million credit facility. That commitment letter, from


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Citicorp USA

, is contingent on Metromedia's finding banks to cover the $287.5 million out of the $350 million that Citicorp remains noncommittal about.

Unfortunately for Metromedia -- but understandable given the allergic reaction that investors have toward telecom service providers this summer -- there's no sign that any volunteers are stepping forward. They certainly had plenty of time; the July 31 deadline is a one-month extension past the original expiration date of Citicorp's promise.

Milestones on Metromedia's road to nowhere

1. Oct. 29, 1997 Metromedia stock closes its first trading day at $21.38 (a split-adjusted $1.34) after its IPO is priced at $16 ($1). 2. Nov. 25, 1997 With the stock at $17.38 ($1.08), Salomon starts coverage with a buy rating and an 18-month target of $27-$30 ($1.69-$1.88). 3. Aug. 31, 1998 Trading at $51.50 ($3.22), the stock splits 2-for-1. 4. Dec. 23, 1998 Trading at $60.06 ($7.51), the stock splits 2-for-1. 5. May 20, 1999 Trading at $87.88 ($21.97), the stock splits 2-for-1. 6. March 28, 2000 The stock hits an all-time high of $101.13 ($50.56), less than three weeks after the Nasdaq Composite index hits its peak. 7. April 18, 2000 Trading at $53.19 ($26.60), the stock splits 2-for-1, its last split. 8. July 25, 2001 A day after the stock closes below $1 for the first time, Salomon cuts its rating to neutral from buy.

Sources: Yahoo Finance, Dow Jones Newswires.

"We are regrettably downgrading MFNX," Grubman wrote in a Wednesday morning note, citing the approaching expiration of the $350 million commitment. Separately, he wrote that the company needed perhaps as much as $500 million to be "safely fully funded."

Grubman had long had high hopes for Metromedia. He initiated coverage on the company a month after its

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IPO, putting a split-adjusted target of $1.69 to $1.88 on the stock; at the time it was trading at a split-adjusted $1.08.

Grubman's expectations, and those of others on Wall Street, were met and then some. Metromedia closed as high as a split-adjusted $50.56 in March 2000, driven by expectations of explosive demand for the high-capacity fiber data networks it was planning to build out in more than 60 cities in the U.S. and Europe. Though the cost of building out the network was going to be expensive, investors' confidence was somewhat bolstered by the presence of controlling shareholder John Kluge, who'd made billions in the past by borrowing big to build a broadcasting and cellular-telephone empire.

All Dried Up

But starting earlier this year, the company started feeling the fallout from the weakening economy and the Internet implosion -- for example, when customer

Winstar Communications

filed for bankruptcy. In mid-June, Metromedia guided down expectations for the second half of the year. To some degree, it's arguable that Metromedia's problems come mostly from investor perception: Analysts say the company's urban markets don't suffer from the capacity glut characterizing the long-haul fiber market. And they say the revenue shortfall doesn't principally stem from its fiber business.

Meanwhile, Grubman has stayed bullish. In March, writing about the company's fourth-quarter 2000 results, he concluded, "MFN is uniquely positioned to capture growth in this industry. ... We believe that MFN is truly becoming one of the core companies in the entire IP/infrastructure space." He repeated those comments after the first quarter's results arrived in late April.

It is unclear whether Grubman's evident hope, until now, that the $350 million would come through had anything to do with Salomon's life under the same corporate red umbrella as the prospective lender.

In the past, though, the well-compensated Grubman has drawn fire for being especially bullish when there were huge investment banking fees at stake. In November 1999, he altered his bearish stance on


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just as Salomon was competing to be an underwriter of its

AT&T Wireless


tracking stock IPO. Salomon got the business, AT&T's stock slid, and in late 2000, he downgraded his vintage 1999 buy.

Born to Run?

Of course, it's not as if close economic ties are the only motivations for keeping a bullish outlook on a falling stock. Robertson Stephens has a buy on Metromedia, but it hasn't done underwriting for the company. Analyst Jim Friedland declined to comment on the stock and his rating.

It could just be that people like the company, as does Cary Robinson, senior analyst at U.S. Bancorp Piper Jaffray, another nonunderwriter. Robinson, in fact, has a strong buy on Metromedia. Even if Metromedia fails to get the credit line, "it's not over," he says. "They have enough money to make it through the end of the year. And beyond."

And Robinson believes someone will understand Metromedia's value isn't diminished by current economic conditions and perceptions. "This is one company where I see demand for their physical assets," Robinson says. "And I think that somebody smart's going to cut a real deal here."

With Grubman having abandoned the ship, Robinson's aware that he's among a thinning crowd of believers. But he's not deterred. "I know we're out on the edge," he says. But, he adds, "from 80 cents, it doesn't take much to get this thing to run."