Could PSIX be the next CWP takeover target?
biz.yahoo.com
Monday May 14, 10:24 am Eastern Time
C&W in $340 mln Digital Island buy
(UPDATE: Adds analyst in paragraphs 7-8, Digital Island shares in paragraph 4)
By Jean Yoon and Richard Baum
LONDON, May 14 (Reuters) - Cable & Wireless Plc dipped into its warchest on Monday to buy struggling U.S. Internet firm Digital Island for $340 million, underlining its reluctance to return its six billion pound ($8.5 billion) cash pile to shareholders.
The British telecoms company, which is under pressure from shareholders to announce a special dividend with Wednesday's annual results, said the deal would boost its Website hosting business.
It is offering $3.40 in cash for each share in the San Francisco- based company, which runs Websites for companies requiring a high degree of interactivity.
That is an 8.7 percent premium to Friday's closing price of $3.13, but a fraction of Digital Island's high of $148 a share in December 1999, before last year's dot-com crash. The stock jumped to $3.35 in early trade.
C&W shares, which slumped following a profit warning in March, rose 0.8 percent to 447 pence. The purchase price includes $49 million of net debt.
The takeover is the biggest step yet in C&W's plan to spend its cash on Internet-related acquisitions in the United States and Asia. It is transforming itself into a global Internet services company after selling more mature operations in Hong Kong and Australia.
SECTOR GIANT CAUTIOUS
Analyst James Enck of Daiwa questioned whether C&W should be buying a Web hosting business when U.S. giant Exodus Communications Inc (NasdaqNM:EXDS - news) had recently scaled back its expansion plans, signalling doubts about demand for hosting.
``It's bright to be consolidating at a time of eroded values but if the global leader is sending such a signal of caution and concern about the prospects for hosting I'm not sure the market is going to welcome this,'' he said.
Digital Island announced a second quarter loss of $1.19 billion last week after writing off more than $1 billion in assets. It is cutting its workforce by a fifth.
C&W said the acquisition was expected to be earnings dilutive in the near term, but would enhance them by the end of the third year.
Enck said it would dilute earnings before interest, tax, depreciation and amortisation (EBITDA) at C&W's core Global division by 33 percent in the current year.
The announcement comes just ahead of C&W's annual results, when shareholders will be looking for further news of its plans for its cash. It is expected to say it had three billion pounds net cash at the end of March, which will double when its sale of C&W Optus in Australia completes later in the year.
C&W Chief Executive Graham Wallace has refused to return cash to shareholders, although people familiar with its plans say the firm might do so if it could not find suitable acquisitions.
It was reported to have made an approach to Exodus, but was rebuffed. Analysts say hosting company PSINet Inc (Nasdaq:PSIX - news) could be a target.
Some shareholders want it to return cash, particularly as it would help them subscribe to British Telecommunications Plc's 5.9 billion pound rights issue. But at least one of C&W's largest investors backs the company's acquisition plan.
``By combining the innovations of Digital Island with the world class IP (Internet Protocol) network and financial backing of Cable & Wireless, Digital Island gains renewed momentum,'' said Digital Island Chairman and Chief Executive Ruann Ernst.
Digital Island's customers include E-TRADE, UBS Warburg, FT.com, Sony Corp , Cisco (NasdaqNM:CSCO - news) and Microsoft (NasdaqNM:MSFT - news). |
