Hey, SBC–Wanna Drag?

Ron Henriksen is taking on a telecommunications giant and an entrenched competitor – for a second run around the racetrack.
By Lynn J. Cook
Forbes 12/8/03

Ron Henriksen is taking on a telecommunications giant and an entrenched competitor–for a second run around the racetrack

When Ron Henriksen suits up for a race at Texas World Speedway an hour outside Houston, he dons a fireproof suit and Kevlar gloves and shoes. He's been racing for 33 years, so pushing the turns and lining the straightaways are second nature. Still, it's a comfort to know that if he hits a wall, he won't get burned.

If only there were such protections in the dicey world of telecom, where Henriksen, 57, has banked curves for 20 years. A year ago he bought bankrupt voice-and-data company LOGIX Communications for $23 million in cash just as regional calling companies were crashing. Henriksen was the lone bidder for the limping telco.

Why bother? First, he paid pennies on the dollar for switching equipment worth $90 million new. Then there was LOGIX's base of 15,000 small- and midsize-company customers for phone and Internet service, some paying $20,000 a month. Don't discount sentimental value: Henriksen founded this company in 1983 and made a killing when he sold it in 1998 for $130 million at 27 times earnings. "Buying back this thing I had created for so cheap was hard to pass up," he says.

LOGIX got its start as American Telco when Henriksen put up $5,000 to lease a switch and competed for callers in the deregulated long-distance market. At 36 he'd already had two careers–one as a corporate pilot for energy companies and another flipping apartment complexes in Houston. Then a friend asked him to invest in a telecom startup in Phoenix; the prospectus spelled out exactly how he planned to build a network and compete with AT&T. Instead of investing, Henriksen ripped off the idea and started his own company in Houston.

American Telco offered long-distance callers cheaper service routed mostly over its own network in Houston, Austin, Dallas and San Antonio. In the wake of the Telecommunications Act of 1996, while analysts figured that deregulating local phone markets would eclipse long-distance deregulation, Henriksen had another hunch. "Everyone saw promise in deregulation, but I saw a fight." SBC Communications, he predicted, would do anything to keep its monopoly. Henriksen reckoned SBC's resistance to customer erosion would destroy small local telcos. So he cashed out. Smart move. By gumming up the works at state-level public utility commissions, SBC has held defections from its local service to 15% since 2000.

While the company was in good shape at the time, poor management and unrealistic expectations almost killed it. It floated $350 million in junk bonds at an impossibly high 12.25% interest rate, then blew the proceeds–and then some–to grab all the latest equipment, including a $6 million Nortel switch in Dallas, when a $400,000 Siemens switch would have done the trick. The company's employee base tripled to nearly 1,000, but sales never rose above $85 million. "It was like building a Carnival Cruise ship because two guys wanted to go on vacation," Henriksen says of its excesses. LOGIX missed a $5 million interest payment in December 2001, and both it and its parent filed for Chapter 11 protection, with $400 million in debt.

Still, Henriksen saw value. LOGIX now sells "smart" wiring to office-building owners so tenants can use one provider for all local, long-distance and Internet services. Hardly a new concept. In fact, it's a strategy that broke companies such as BroadBand Office and OnSite Access. But Henriksen's approach is different–and his mantra is "cheap." LOGIX can pull lines from basements to penthouse suites for just $10,000 by using twisted-pair copper wires and long-reach Ethernet instead of fiber optics (which would have cost $250,000). Maybe its smart wiring isn't all that smart, but LOGIX can still gross 70% on that business.

Fiber-optic lines can transmit data at 2.5 to 10 gigabits per second, but most offices don't need that kind of speed–or 50,000 phone lines. By charging $28 per phone line, LOGIX can beat SBC, an estimated $45, every time. "We're not putting more capacity in there than the building could ever use in 500 years," says Henriksen.

LOGIX has lit up 33 buildings, most in Houston. Yet the smart-wiring strategy accounts for only 2% of LOGIX's $75 million in revenues (the rest is split between customers who go through LOGIX to get cheap service over SBC's lines and those who get voice and data services over LOGIX T-1 lines). Judging by the orders coming in from Austin to Oklahoma City, Henriksen is betting that within five years smart wiring could make up 85% of sales. Still, a potential spillout always lurks just around the next embankment.

© 2003 Forbes Inc.