MORNING MEETING NOTES - November 11, 1997
09:08am EST 11-Nov-97 Gerard Klauer Mattison & Co. GKMAM PSIX AAPL SUMMARY
MORNING MEETING NOTES
November 11, 1997
Rating and Estimate Changes
NONE
PSINet/PSIX HOLD ARTHUR NEWMAN
(212) 885-4054
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Price 52-Week Earnings Per Share P/E Ratio 12-Month
11/10/97 Range 1996 1997E 1998E 1997E 1998E Target
7.66 14.50-5.50 (1.32) (1.22) (0.75) N.M. N.M. N.A.
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PSIX+-- To Acquire iStar, a Canadian ISP for $25 Million in Stock --HOLD
o PSIX to acquire iStar, a leading Canadian ISP, for $25 million in stock.
PSINet Limited, a wholly owned Canadian subsidiary of PSIX, has entered into
a definitive agreement for the acquisition of iSTAR for $25 million in PSIX
convertible preferred stock and an immediate payment of approximately $3.6
million in short-term financing. We estimate PSIX paid less than 1x
annualized iSTAR trailing quarter revenue, significantly less than other
recent acquisitions in the sector. We maintain our HOLD rating.
o Maintain estimates. The transaction is scheduled to close in 1Q98; thus,
we maintain our 1997 estimates. Our 1998 estimates are under review pending
further details of the transaction. Management estimates that the merged
Canadian company should achieve annual revenues of about $34 million. It is
unclear whether the transaction will be dilutive in 1998.
o iSTAR currently serves about 1,350 corporate and web service customers
as well as 66,000 dial-up customers through 30 POPs across Canada. For the
8/31/97 quarter, iSTAR reported about $7.6 million in revenues and $(3.4)
million in EBITDA. PSINet Limited (Canada), headquarted in Toronto,
currently has 81 employees and iSTAR employs about 200 people in various
offices throughout Canada. The combined corporate headquarters will be in
Toronto.
o PSIX remains potential acquisition target. Nonetheless, we are hesitant
to recommend purchase solely on this possibility. Despite recent deals for
BBN and Digex, PSIX may continue to be left at the altar. IIXC agreement
could reduce PSIX's attractiveness to facilities-based carriers.
o PSIX conference call at 10:00 a.m. EST (612) 332-0345.
INVESTMENT CONCLUSION
We believe PSIX faces significant competition in the US, and is encountering
difficulties in acquiring subscribers, growing revenues and achieving
positive EBITDA; thus, PSIX may be trying to grow its business through
international expansion. On a valuation basis, we believe PSIX paid less than
1x annualized trailing quarter revenues for iSTAR, substantially less than
other recent acquisitions in the sector. We believe PSIX is trying to fill
capacity created through its agreement with IXC. We remain cautious regarding
our estimates as PSIX transitions to its goal of achieving positive EBITDA.
Until the company's ability to grow revenues, leverage operating expenses and
achieve positive EBITDA and EPS become clearer, we maintain our HOLD rating. |
