Anestis, a Harvard Business School grad and railroad consultant who'd been brought in to shake things up at staid FEC, was intrigued. He hired a Boston-based management consulting firm called Monitor Group to evaluate a potential telecom strategy for FEC.
Within months of his arrival at FEC, Anestis and his board of directors had signed off on Monitor's recommendation to create a telecom subsidiary. Called Epik Communications, the subsidiary planned to build its own network of fiber-optic cable; it would then lease space on the network for voice and data communications -- bandwidth -- to long-distance carriers, wireless companies and internet service providers. The strategy called first for building a network connecting Florida's major cities and then expanding the system nationwide. To lead the effort, Anestis hired John McClellan, the Monitor telecom consultant who'd prepared the study for FEC.
Ultimately, Epik Communications -- based in Orlando -- would spend $350 million to create 1,850 miles of fiber from Atlanta to Miami. To help pay for the expansion, FEC mortgaged some of its commercial real estate holdings. FEC had high hopes for its new subsidiary. In his message to shareholders in 2001, Anestis wrote that he expected Epik revenues to "ramp up significantly."
Unfortunately, FEC was late to a party that was about to break up. By late last year, telecom growth had slowed significantly, and Epik was hurting.
Most of the industry's problems can be traced to overcapacity. Spurred by the Telecommunications Reform Act of 1996, designed to open the historically regulated industry to competition, telecom firms went on a building binge. In addition to Epik, regional units of in-state power companies, FPL FiberNet and Progress Telecom, installed fiber networks in Florida -- along with the big national telecom players like Qwest and Global Crossing.
By the time the internet bubble burst, an estimated 39 million miles of fiber-optic cable stretched underneath the U.S. Today, only 10% of it is in use, according to the recent estimates by Merrill Lynch & Co. To pay for it all, telecom companies borrowed more than $1.5 trillion from banks and issued more than $630 billion of bonds since 1996, according to Thompson Financial.
The suffocating debt forced many smaller firms to close their doors and forced bigger companies like Global Crossing to seek bankruptcy protection. "People talk about the occurrence of a 100-year flood," Anestis says. "Telecom is now experiencing the 1,000-year flood."
To protect itself against the rising waters, FEC drastically curtailed Epik's aggressive expansion plans. The nationwide rollout is on hold. Capital spending this year has been pared back to a paltry $5 million to $8 million; operating costs have been slashed. FEC wrote down $98 million of its investment in fiber optic.
At the same time, Anestis replaced McClellan, Epik's founding president, and Benjamin Finzi, its first chief operating officer and current chairman of Florida's technology task force, IT Florida. E. Craig Sanders, a telecom veteran who has overseen several turnarounds, has been hired as president. His charge: To stabilize the bleeding and build revenues.
While the outlook for the wholesale fiber-optic business is bleak, Epik has a few things in its favor. Unlike most telecom firms, Epik's parent company, FEC, has a relatively strong balance sheet. That should give Epik an edge because customers will want to sign contracts with providers they know will still be around. "Price is important, but so are financial security and stability," says Nancy Bedard, an analyst at The Yankee Group, a communication and technology research firm in Boston.
Another plus is Epik's presence in Florida, where the telecom market is expected to benefit from the state's continued population growth and its role as the communications gateway to Latin America. The opening last year of the NAP of the Americas in Miami should benefit Epik. A NAP, or network access point, is a facility where big communications carriers route traffic and hand it off to each other to get it where it needs to go in the most efficient way.
Still, Epik's future is unclear. While most telecom companies have written down much of their fiber-optics investment, FEC has decided to hold out. Anestis likens the Epik investment to a "paid up call option" on the telecom industry. If the industry rebounds, Epik is positioned to benefit. Meanwhile, Epik's losses help lower FEC's tax bite by offsetting profits earned from FEC's transportation and real estate operations.
There's also some pressure to sell Epik. "Something needs to be done with Epik," says Herbert Peyton, president of Jacksonville-based Gate Petroleum and one of FEC's outside directors. "If the right deal came along, we'd sell it." Given the condition of the industry, however, that's probably wishful thinking at this point.
Meanwhile, Anestis says he has no regrets about venturing into telecom. "We'd do it again with what we knew at the time. My job is not to keep things the way they were. My job is to use the assets in creative ways."