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KPNQwest network gets one-day reprieve

Administrators give customers more time to attempt to keep network services running, but analysts advise caution before companies pay their bills.

The network of bankrupt KPNQwest received a one-day reprieve Monday, as administrators extended their deadline for receiving cash to keep the operation running.

Whether or not the network shuts down, the company itself is finished, according to industry sources, leaving Colt Telecom as the only remaining pan-European alternative provider.

KPNQwest runs Europe's largest fiber-optic network, carrying one-quarter of the region's IP traffic, and providing services for companies such as Dell, Hewlett-Packard and Nokia. It is a joint venture between Dutch national carrier KPN and U.S.-based Qwest Communications International.

Customers have been asked to pay up-front for the next month to provide funds for a skeleton staff to keep the KPNQwest network running for that time. Bert Siebrand, senior analyst of technology and telecommunications at SNS Securities, called the move a game of "bluff poker" by the administrators.

However, the administrators have now extended the deadline, saying they will announce the fund-raising results by around midday on Tuesday.

"I would say to customers, take it one day at a time," rather than pay up, Siebrand said. The administrators have not specified how much money they require to be pledged, though the network costs an estimated $471,213 a day to run, so the company must require at least $14.1 million for the month. On top of this, however, the company has financial responsibilities, including payouts to redundant staff.

If customers don't put up enough to keep the network going, then they may lose the money they put in. "It's an interesting exercise in game theory," Siebrand said. KPN may hold the key, as its debts to KPNQwest are reportedly large, and it might face trouble if a shutdown affected a big customer such as an airline e-commerce site.

KPN has several customers that use KPNQwest bandwidth; it has reportedly signed a deal to hand those over to Colt Telecom.

Siebrand and other analysts said that KPNQwest's actions should face a formal investigation as they may have involved financial fraud.

Analysts want an investigation
In fact, analysts are calling for an investigation into the business dealings of KPNQwest.

"Jack (McMaster, KPNQwest chief executive) must have lied to the banks in March to get a credit facility," said Bert Siebrand, senior analyst, of technology and telecommunications at SNS Securities. He said the U.S. Securities and Exchange Commission and its Dutch equivalent, the AFM--or the Ondernemmingskamer, a court that investigates business malpractice in the Netherlands--should investigate the company. "I can't imagine they will get away with this," he said.

"It looks very much as if KPNQwest pumped up its EBITDA (earnings before interest depreciation and amortization) by booking income as revenue that should not have been booked as revenue," Siebrand said.

KPNQwest appeared to be profitable in February, gave a profit warning in April and went bankrupt in May.

Bid from Germany German company 1&1 Internet said it plans to bid for a major data center owned by KPNQwest.

Web hosting company 1&1 said it would put in a bid for KPNQwest's Karlsruhe data center, which is said to host about two-thirds of Germany's corporate ".de" Internet addresses. If the bid is successful, however, it would mean that 1&1 would own a center housing the servers of its competitor, Strato.

But 1&1 already operates a data center in Karlsruhe and has been building an additional location in the city over the past year, which is set to go into operation in November with five times the capacity of the old location. Frenzel said that if 1&1 does acquire the KPNQwest facility, the company will close down its original location.

Strato declined to comment on 1&1's offer, and would not say whether Strato is mounting a competing bid.

Peter Judge reported from London.

ZDNet Germany's Sebastian Brinkmann contributed to this report.