Matthew Swibel, 11.01.04
How a Nebraska boy built an island empire with other people's money
Jeffrey Prosser, owner and head of Innovative Communication, spent his 48th birthday this September in Washington, D.C. working with $500-an-hour lawyers to stave off a pack of creditors and regulators who are ready to have him tarred and feathered. "Yuck," he says, with an exaggerated shudder. He would have been happier in the U.S. Virgin Islands. That's the base from which he has built a constellation of telephone, newspaper, banking, cellular phone and cable TV assets with cunning, moxie and other people's money. Or in Palm Beach, Fla., where he and second wife, Dawn, regulars on the charity circuit, reside with one of his four children while their $14 million St. Croix beachfront mansion gets a makeover.
Among Prosser's adversaries are the former minority shareholders of a firm Prosser merged into Innovative. In May a Delaware chancery judge found Prosser personally, and his corporation, liable to them for $220 million in damages.
A month later the not-for-profit Rural Telecommunications Finance Cooperative of Herndon, Va. accused Innovative of 31 breaches of its lending agreement and filed suit to get the $550 million it lent Innovative--the most it has ever lent one company--repaid at once. In August Virgin Islands regulators questioned whether Innovative's phone company there had made an improper $28.5 million loan to Belize Telecommunications, which an affiliate of Innovative acquired for $105 million in stock in March.
When pressed, Prosser admits he has thought "for more than a moment about losing it all." At a sale of physical assets, say, at bankruptcy, its assets would likely go for an estimated $360 million. But as of now Prosser is keeping current on all his loan payments and so may be able to hang on to his steeply leveraged empire. "I am waiting to see if any of my four children are interested in coming in the company," he says.
The ruddy-faced 6-foot-3 Prosser grew up in Falls City, Nebr. (pop. 5,000). As a teenager he drove a bulldozer and spliced cable for the telephone company where his father worked. In Lincoln he got an accounting degree at the University of Nebraska. He was off to the Caribbean at age 25 on behalf of some Nebraska investors interested in buying an alumina plant in St. Thomas. The purchase collapsed, but he kept angling for deals there. When he learned ITT was selling its Virgin Islands telephone business, Vitelco, he made an unsolicited $87 million bid. The telecom giant gave the then 29-year-old the cold shoulder. But six months later, in June 1986, it finally gave in to his persistence. Prosser lined up 105% debt financing from E.F. Hutton & Co. with help from Neil Prior, a telecom banker at now-defunct Kidder, Peabody & Co. Prior left Kidder and took 30% of Vitelco's equity for himself.
Prior knew a good deal when he saw one. Vitelco faced no competition and was guaranteed an 11.5% return on investment by the Virgin Islands Public Service Commission. Sweetening the deal, the USVI Industrial Development Commission had granted the company an abatement of 90% of income taxes and 100% of gross receipts, property and excise taxes. The new owners refinanced in just one year, replacing the Wall Street loan with a $104 million loan at a below-market rate from the Rural Telecommunications Finance Cooperative.
In 1991 Prosser and his partners bought 80% of Guyana Telephone & Telegraph for $25 million. Eleven months later they took Vitelco's holding company public with an offering of 4.4 million shares, 40% of the total, at $19 per share. That made the then 35-year-old Prosser's stake worth $63 million. He divorced, remarried and bought a Rolls-Royce.
Prosser's acquisitions and spending style led to a falling-out with the older Prior. They sued each other in 1995. Prosser was facing protests over his use of private jets as well as a shareholder plan to oust him. The putsch failed, but Prosser and Prior agreed in 1996 to split the company in half. Prosser ended up owning 52% of the publicly traded Virgin Islands business, now called Emerging Communications. Prior took the Guyana telecom.
Prosser kept buying. He used a newly formed company named Innovative to acquire four Caribbean cable-TV companies and Gannett's Virgin Islands Daily News. Then he moved to consolidate his budding empire, eventually settling on a plan to have Innovative buy out Emerging Communications, ridding himself in the process of minority shareholders.
Innovative paid $10 a share for Emerging Communications, the telecom finance co-op that Prosser arranged to finance the buyout, determined the shares were worth $28 each. Nevertheless, Prosser's hand-picked board at Emerging approved the $10 price. In addition to holding Prosser and Innovative liable for $220 million, the judge in Delaware held two Emerging board members liable for part of that; one was Prosser's personal attorney from Omaha, who also served as general counsel of Emerging. Prosser considered an appeal but now looks likely to settle for $100 million. He appears to be chastened by the decision. "The Delaware case made me open my eyes," he says.
Some federal agencies, however, still seem to have their eyes shut. Despite the litigation, last December the U.S. Department of Agriculture's Rural Utilities Service guaranteed a $64.7 million loan to Innovative from the Treasury's Federal Financing Bank at an annual interest rate of only 1%. (Very few of FFB's 183 other borrowers have gotten more than $2 million.) The RUS lent another $1.6 million directly to Innovative at 4.3%. In addition to the subsidized loans, Prosser collects $1.2 million a month from the Federal Communications-administered Universal Service Fund. This is a subsidy slush fund paid for by a federal phone tax.
With the financing still flowing, Prosser kept on buying. In April the government of Belize gave Innovative permission to buy all the stock of Belize Telecommunications Ltd. from Lord Michael Ashcroft and Carlisle Holdings for $105 million. "If someone wanted to break free from regulators and creditors, this is a place to consider opening shop," snipes Eric Cowan, outside counsel for the RTFC.
For that deal to go through, Prosser needed cash to pay down Belize Telecommunications' debts to the Belize government. In February Vitelco sold 85,000 shares of preferred stock to unidentified investors for $82 million. Both the rural telecom cooperative and Virgin Islands regulators allege that Vitelco wrongfully took $28.5 million of its proceeds and lent it to Belize Telecommunications in March.
Oops. The co-op's loan agreement requires Innovative and its subsidiaries to use any funds from financing activities to pay down the loan from the co-op. So says the co-op, at any rate. Prosser argues otherwise. The dispute is tangled up in arcane arguments about subsidiaries and technical defaults. Prosser also says that the Belize transaction is irrelevant because Virgin Islands-based Innovative, which borrowed the RTFC money, didn't acquire it. That was done by a different special-purpose Delaware corporation, also named Innovative.
In an effort to settle, Innovative has twice offered to restructure loan payments. But the co-op is in no mood to cut deals with Prosser; it wants him removed and wouldn't mind seeing Innovative forced into bankruptcy.
Meanwhile, the Virgin Islands Public Service Commission's rules prohibit Innovative or Vitelco from making any loans to foreign businesses, such as Belize Telecommunications. And the commission's staff is raising a stink about how Innovative could claim, in its recent request for an extension of tax breaks, to need more money for capital projects while at the same time shipping $28 million off to Belize.
"We are looking into whether or not the loan was or wasn't technically in violation of a PSC order from years ago," says Lanny Davis, a Washington, D.C. lawyer speaking for Prosser. (The smooth-talking Davis is best known as spinmeister to former President Clinton during the Monica Lewinsky days.)
Meantime, competition from wireless and an upstart Virgin Islands broadband service launched in November could erode Vitelco's customer base and its $53 million a year in revenue. As a going concern, Innovative's assets might be worth $1 billion, says Prosser. But in a sale like bankruptcy, physical assets would go for maybe $360 million. That's only 65% of its debt to the rural co-op.
Is Innovative insolvent? "It depends on what your definition of insolvency is," says Davis. Clinton couldn't have said it better.
By the Numbers
Jeffrey Prosser has assets and a mountain of debt across the Caribbean.
$550 million Prosser's outstanding loan from RTFC.
70,000 Number of Vitelco customers.
3 Private jets owned by Innovative.
$105 million Amount paid for Belize Telecommunications Ltd.
Sources: Innovative Communication; legal documents. http://www.forbes.com/forbes/2004/1101/124_print.html