"We think Verizon's move throws Genuity into the abyss and may be a death sentence," said Kaufman Bros. analyst Vik Groven. He downgraded Genuity shares to "sell" from "hold."
Thursday July 25, 1:49 pm Eastern Time
Reuters Business Report
Genuity Slammed After Verizon Decision
NEW YORK (Reuters) - Shares of Genuity Inc. lost 80 percent of their value and the company was thrown into debt default on Thursday as Verizon Communications Inc. ruled out a rescue of the money-losing high-speed communications services company.
Genuity (NasdaqNM:GENU - News) shares dropped to 51 cents, down $2.08, in afternoon trade on Nasdaq. Shares of Verizon (NYSE:VZ - News), the No. 1 U.S. local telephone company and Genuity's former corporate parent, gained 72 cents to $28.57 on the New York Stock Exchange.
"We think Verizon's move throws Genuity into the abyss and may be a death sentence," said Kaufman Bros. analyst Vik Groven. He downgraded Genuity shares to "sell" from "hold."
Verizon said it had decided not to reabsorb Genuity and would not be obligated to make further loans to the company. Verizon was forced to spin off Genuity as a condition of the merger of Bell Atlantic Corp. and GTE Corp. that created Verizon in 2000.
GENUITY IN TALKS WITH BANKS
Genuity said Verizon's decision caused it to default on its credit agreements. It said it was in talks with its banks and Verizon to review the consequences.
Woburn, Massachusetts-based Genuity said it previously asked its banks, which provided it with a $2 billion credit line, to give it the $850 million remaining available under that line.
So far, it has received about $723 million, with eight of the nine banks fulfilling their funding obligations, bringing its total cash balance to about $1.3 billion. Deutsche Bank was the only member of the consortium that failed to fulfill its obligation under the credit facility. Genuity said it has taken legal action against the bank.
Verizon said its decision not to take control of Genuity was based on a variety of factors, including market conditions and its business needs.
CS First Boston analyst Dan Reingold said buying back Genuity would have caused "potentially substantial earnings dilution" for Verizon. He said the possibility of such a deal had been a negative factor weighing on Verizon's stock.
He said of the Verizon decision, "This is a positive for Verizon shares as it alleviates one of the major overhangs on the stock." He expects Verizon to take a $2.4 billion write-off in either the second or third quarter related to Genuity value and debt.
Groven said the Verizon decision could be a death sentence for Genuity "given (Genuity's) substantial negative EBITDA (earnings before interest, taxes, depreciation and amortization) of $500 million, the weak outlook for enterprise data demand, and overall sector distress."
VERIZON SEEN LEASING, NOT BUYING, LONG-DISTANCE
New York-based Verizon has been moving into the long-distance telephone market in its home region and has grown to become the No. 4 U.S. long-distance telephone company.
Verizon will continue its commercial relationship with Genuity, including its continuing five-year purchase commitment, and plans to continue using Genuity's Internet-based backbone services. It also will continue to use Genuity services to supplement its network in states where Verizon offers long-distance and Internet services.
Although some analysts previously suggested Verizon might acquire a distressed long-distance carrier such as WorldCom (Nasdaq:WCOEQ - News) or Qwest Communications International Inc. (NYSE:Q - News), Reingold said he expected the Baby Bell to use wholesale capacity rather than make a costly purchase.
Verizon exercised its right to convert its current stake in Genuity into shares of Class A common stock constituting just under 10 percent of Genuity's capital stock. As a result, it no longer has the right to convert to a controlling position, which would have represented about an 80 percent interest. |
