PSIX-Raises $30 Mil., Acquires Canadian ISP for $25 Mil., Reducing Ests- HOLD
12:28pm EST 12-Nov-97 Gerard Klauer Mattison & Co. (Newman, A. 212-885-4054)
PSINet+(PSIX)-Raises $30 Mil., Acquires Canadian ISP for $25 Mil., Reducing
Ests- HOLD
Arthur Newman Jill Loesberg
(212) 885-4054 (212) 885-4094
anewman@gkm.com jloesberg@gkm.com
November 12, 1997
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Price: 7.13 52-Wk Rng: 14.50-5.50 S&P 500: 924
Shrs Out/Mk Cap: 40Mil/$285Mil 9/30/97 Bus. Subscribers 23,000
Div/Yield: --/--
Avg Daily Vol: 449,000
Float: 24Mil
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FY Ends -- EPS -- EBITDA
Dec. Curr Prior Curr Prior
96A $(1.32)* $(0.71)
97E (1.24) $(1.22) (0.53) (0.52)
98E (0.92) (0.75) (0.14) 0.04
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Qtrly -- 1Q -- -- 2Q -- -- 3Q -- -- 4Q --
Curr Curr Prior Curr Prior Curr Prior Curr Prior
96A $(0.39) $(0.28) $(0.23)* $(0.42)
97E (0.33)A** (0.28)A (0.26)A (0.37) $(0.34)
98E (0.31) (0.24) (0.26) (0.20) (0.20) (0.17) (0.15) (0.14)
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@Quarters may not total due to rounding. * Excludes $(0.08) in non-recurring
charges. ** Excludes non-recurring charges and gain on sale of software
division.
+Gerard Klauer Mattison & Co., Inc. is a market maker in the security of
this company and may have a long or short position.
o PSIX completes private placement of $30 million. PSIX announced that it
has received a $30 million investment by Brown Simpson Asset Management (lead
investor), SBGC Warburg Dillon Read, Lehman Brothers and KA Investments, in
exchange for new Series B 8% convertible preferred stock. Under a three-
year agreement, the convertible preferred shares will accrue dividends at an
annual rate of 8%, payable quarterly, in cash or PSINet Series B convertible
preferred stock, at PSIX's option. The securities are convertible into PSIX
stock at $10 per share. The proceeds will be used, in part, to fund
operations in France and Canada.
o Reducing 4Q97 and 1998 estimates. We are reducing our 4Q97 EPS estimate
to $(0.37) from $(0.34) to reflect a delay in the closing of the IXC
Communications (IIXC - 34) transaction and more specifically the issuance of
shares (see our First Call comment dated 7/23/97) and thus, we have reduced
our shares outstanding accordingly. Our 1998 estimates have been reduced to
reflect the iSTAR acquisition (scheduled to close in 1Q98), which will be
dilutive in 1998. We project 1998 revenues of $205 million, up about $30
million from our previous estimate. Our 1998 EBITDA and EPS estimates have
been reduced to $(7.3) million and $(0.92) respectively, from $2.1 million
and $(0.75). We now project PSIX to achieve positive EBITDA in 4Q98.
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.
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. The $30 million should
provide PSIX with additional breathing room to fund operations until it
achieves positive cash flow. 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.
Yesterday PSIX announced that it will acquire iStar, a leading Canadian ISP,
for $25 million in stock (see our First Call comment dated 11/11/97). 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. The purchase will be accounted for as a
purchase, thus, the company does not expect to incur any one-time charges.
The company expects the transaction to close in 60 to 90 days.
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.
CALENDAR OF UPCOMING EVENTS
Date Event
Mid. - Jan. 4Q97 EPS $(0.37)E vs. $(0.42).
Please contact your GKM salesperson for further details. |
