Lehman Details Pros, Cons In VerticalNet's Sale Of NECX
By DINAH WISENBERG BRIN
Of DOW JONES NEWSWIRES
PHILADELPHIA -- VerticalNet Inc. (VERT) snared a blockbuster software deal and a potentially valuable stake in another business by agreeing to shed its NECX electronic components exchange, but may be selling at a loss and confusing investors, a Lehman Brothers analyst said in a research note Thursday.
Though he has some concerns, analyst Patrick Walravens called the decision to sell NECX to Converge Inc., a new, private consortium of 15 leading electronics companies, an overall positive move for VerticalNet, which operates industry-specific online communities.
Lehman Brothers reiterated its "buy" rating on the Horsham, Pa., company, and lowered its 12-month price target to $15 a share from $50. At least a half-dozen other analysts have cut their ratings on the company since it announced the sale this week.
"I think the transaction was a good move," Walravens said in an interview. It was becoming clear that NECX was having a hard time meeting expectations, and the sale is a nice solution for VerticalNet, he said.
VerticalNet, which acquired NECX last year, is now selling the business for a 19.9% stake in privately held Converge, making it the consortium's largest shareholder. The deal, which also allows VerticalNet to keep $60 million in cash now on NECX's balance sheet, is expected to close in the first quarter.
Converge, which includes major electronic component buyers and sellers such as Gateway Computer Inc. (GTW), Agilent Technologies Inc. (A) and Hewlett-Packard Co. (HWP), also entered a $107.5 million software and services agreement with VerticalNet, which displaced Commerce One Inc. (CMRC) as the consortium's planned trading-software provider.
By operating an industry exchange, the consortium hopes to dramatically reduce its members' $200 billion direct-procurement costs.
As a result of the deal, Lehman Brothers has tentatively adjusted its 2001 revenue estimate for VerticalNet to $324 million from $446 million, and its earnings projection to a penny a share from 13 cents. VerticalNet, which had expected to become profitable in the second quarter, now won't reach that mark until the third quarter, Lehman estimates.
"The software deal with Converge is a blockbuster for VerticalNet," Walravens said. It better positions the company to sell software to Converge's founders, he added.
The deal has other benefits, such as helping VerticalNet simplify its too-complex business, according to Walravens.
The analyst said he'd like to see VerticalNet keep its business simple by dropping plans to acquire Sierracities.com Inc. (BTOB), which makes technology for online business-to-business financing. He called the planned addition "one more ball in the air" that VerticalNet doesn't need.
VerticalNet's stake in Converge could be a "significant asset" if the industry consortium is even moderately successful in becoming a trading system for the electronics industry, he said. The deal also could give VerticalNet a leading position in direct procurement for the electronics industry, Walravens said.
But it also makes VerticalNet very dependent on Converge's success, he said.
"If Converge is not successful, the value of VerticalNet's equity stake will be diminished and payments under the software and professional services agreement could be cut short. Despite a powerful group of backers, Converge remains unproven in most respects," Walravens wrote.
VerticalNet's stock has plummeted from $148.38 a share in March to a 52-week low of $4.75 a share this week. Investor concerns over the company's revenue quality have stemmed partly from the fact that much of NECX operates off the Internet, the analyst said.
By shedding the subsidiary, VerticalNet should be able to focus on higher-margin software sales and to expand its price-to-earnings ratio, he said.
Walravens still has concerns about the transaction and VerticalNet, however.
"We think it is more likely than not that the sale of NECX will be accounted for as a loss," he wrote in his research note. VerticalNet acquired NECX and two other companies now part of it for about $300 million in stock; the property now has a market value of about $110 million.
It's difficult to judge a private entity like Converge, Walravens wrote, but for VerticalNet to break even on NECX's $300 million book value, Converge would need to be worth at least $1.5 billion. That's nearly four times the $400 million valuation given to a comparable company, e2open.com, in June, he said.
Walravens also said the divestiture represents a major change in VerticalNet's corporate strategy, which is likely to lead to investor confusion. Only a few months ago the company announced it was organizing itself into three business units and said it wanted to expand its exchange business to include other industries, Walravens noted.
VerticalNet also faces the challenge of convincing thousands of businesses to start paying soon for online storefronts that they initially received for free, Walravens noted.
-By Dinah Wisenberg Brin, Dow Jones Newswires; |
