Cable & Wireless eyeing PSINet
by Michael B. Marois theDeal.com
Posted 05:49 EST, 20, Dec 2000
SAN FRANCISCO - Last week, industry insiders pegged U.S. telecommunications giant Sprint Corp. as a likely bidder for embattled Web infrastructure company PSINet Inc.
Now, they say, another bidder may be on the scene: Cable & Wireless plc. And, speaking on condition of anonymity, at least one source within the British telecom says an offer may soon be on the table. The deal would provide Cable & Wireless with the Web hosting business it wants, as well as a foothold in the U.S. Internet backbone services market.
Ashburn, Va.-based PSINet said in early November it had hired Goldman, Sachs & Co. to shop itself to potential buyers, following a high-profile acquisition failure that led to a dramatic decline in the company's fortunes. PSINet has valued its business at $2 billion to $4 billion, excluding its consulting arm.
Spokesmen from Cable & Wireless and PSINet declined to comment, although PSINet spokesman Doug Baj said the company expects to make an announcement about a potential sale some time in January.
The deal "makes a lot of sense from a lot of perspectives," said Peter J. Decaprio, an analyst with Thomas Weisel Partners llc of San Francisco. "Cable & Wireless has got a huge European franchise ... but it has always been blunted in efforts to penetrate the U.S. market. Hosting makes a lot of sense when you own your backbone."
Skeptics say a deal with Cable & Wireless is unlikely because it has all the network it needs and is satisfied with its customer base. Also, a merger of the two companies could face regulatory issues, since both are among the biggest carriers.
A deal between PSINet and Sprint would also likely face tough regulatory scrutiny, something the Westwood, Kan.-based phone giant may not want to stomach. It is still recovering from the demise of its planned merger with MCI WorldCom Inc. at the hands of federal agencies.
Nevertheless, both Sprint and Cable & Wireless do have choices. Two other Web hosting companies with distressed financials - Data Return Corp. of Irving, Texas, and Digital Island Inc. of San Francisco - also are prime targets.
PSINet's troubles began last summer when the acquisition-hungry company paid $2 billion in stock for Metamor Worldwide Inc. of Houston. As part of the deal, it also took an 80% stake in Xpedior Inc., a Chicago Web consulting company. The deal was supposed to earn as much as $1 billion in revenues, but instead has cost the company millions of dollars.
Now, PSINet says it will have to take a $663 million loss by selling the unit. The man responsible for the deal, President and Chief Operating Officer Harold Willis, was forced to quit in November when the company told investors of the loss.
With a market capitalization one-quarter of its book value and its shares trading under $1, PSINet is a cheap buy. Whoever buys the company, however, must contend with PSINet's financial crisis.
When Willis quit, the company issued a bleak earnings report indicating it had lost $1.38 billion, or $7.34 a share, in the third quarter and warned that fourth-quarter earnings would also be lower than previously thought. PSINet has about $1 billion in cash and $3.6 billion in debt.
Bond holders will play a key role in approving any buyout because the loan covenants state that if PSINet sells any assets, it has 180 days to use the money to pay off bonds at $101 per note. That price reflects a nominal premium over what the bondholders originally paid. The company would have to reinvest the assets in a similar business if that price is not met.
PSINet's management team "hasn't really had a record of demonstrating good operating performance," Decaprio said. "So if you are a bondholder and they sell an asset and they plow the money back in, that is like the worst outcome." |
