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Technology Stocks : PSIX up 26.5%, Takeover(?) -- Ignore unavailable to you. Want to Upgrade?

To: david thor who wrote (1494)	11/12/1997 5:03:00 PM
From: Ken Turetzky	Respond to of 5650

PSIX: Action Galore-Two Acquisitions, a $30 Million Financing 10:08am EST 12-Nov-97 Friedman, Billings, Ramsey &Co (Ulric Weil 703-312-9565) Friedman, Billings, Ramsey & Co., Inc. 1001 Nineteenth Street North Arlington, VA 22200-1722 RESEARCH Technology Brief PSINet (PSIX - $ 7 1/8) ACCUMULATE PSIX: Action Galore-Two Acquisitions, a $30 Million Financing Ulric Weil (703) 312-9565 uweil@fbr.com Dan MacKeigan (703) 312-9666 dmackeigan@fbr.com November 12, 1997 * On October 30 PSIX acquired for $3 million in Cash CalvaCom SA, a small, still unprofitable, French Internet Service Provider (ISP) with 1997 revenues of just under $2 million. * On November 10 the Company acquired iStar, a still unprofitable, leading Canadian ISP with annual revenues of about US $32 million; the purchase transaction is structured as a share exchange or merger. * On November 11 they obtained a $30 million private investment in exchange for the issuance of a new Series B 8% convertible preferred stock. * These transactions add to costs (tangible and intangible), especially early in 1988, but should have no impact on expected 1999 financial results. 52-Week Range: $14 1/2 - $5 1/2 Shares Outstanding: 40.4 MM Float: 34.75 MM Avg. Daily Volume 351,000 Market Capitalization: 287.85 MM Institutional Holdings: 17.5% Insider Holdings: 16.0% Cash & Equivalents (9/97): 43.5 MM Shareholders Equity (9/97): 58.8 MM Long Term Debt (9/97): $26.9 MM Book Value Per Share (9/97): $1.46 FY ROE P/E Revenue 1996A NM NM $89.8 MM 1997E NM NM $127.7 MM 1998E NM NM $236.3 MM Quarterly EPS 96A 97E 98E Q1 (0.39) (0.33) A (0.24) Q2 (0.28) (0.28) A (0.15) Q3 (0.31) (0.26) (0.10) Q4 (0.42) (0.35) (0.02) Full Year EPS ($1.40) ($1.23) ($0.51) The CalvaCom (France) and iStar (Canada) acquisitions demonstrate PSIX's determination to become a global player. The company already has a presence, among others, in the U.K., Germany and South Korea; also for some time PSIX has operated a small Canadian subsidiary (annual revenue of about US $3 million). The iStar deal could be dilutive if, as is likely, the Company elects to pay the new convertible preferred 8% dividend in stock rather than cash. The quarterly dividend of about $600K will show up below the net income line as a distribution to preferred shareholders; the convertible non- voting preferred issue has a three year term and includes protective covenants as to redemption, conversion price and adjustments thereto. The $30 million private financing from marquee name investors provides welcome liquidity to be used for future acquisitions (maybe outside North America). The terms, not dissimilar to the covenants on the iStar converts, are reasonable (8%, three year term, price adjustments and timed conversion opportunities). Another motivation for adding $30 million to its cash balance could be management's desire to 'pretty itself up' for a potential suitor. Once all these transactions are completed on as per share basis PSIX can be valued as follows: about $1.55 in cash, $4.35 for its far flung Network (remember Netcom got an imputed value of $100 for its network) and, according to outside appraisers, $8.70 for its acquired rights to IXC's OCS 48 grade fiber network. These values total $14.60 before adding anything for PSIX's still unprofitable business-oriented customer base numbering over 23,000. Will CEO Bill Schrader entertain offers near, albeit above, that range? Who knows? Recommendation: For PSIX, allowing for the recent acquisitions, our revenue estimates lead to a 2.6 times market cap to 1997 revenue ratio (1.5 times on estimated 1998 revenue); we estimate positive EBITDA beginning in 2Q98, but no earnings per share through 1998. At their current price, the shares have little downside risk, in our view. On a take-out, potential acquirers would have to pay a BIG premium, more than $14.60 per share, to get the CEO's attention. On the other hand, PSIX now has the means to establish an eventually profitable global presence, i.e., go it alone. Risks: The Street actually may believe management's repeated assertion that at the valuation for recent ISP acquisitions (2.5-3 times 1998 revenue) the Company is NOT FOR SALE. If so, the PSINet shares may not be a rewarding investment until EBITDA profitability is achieved-- somewhat of a moving target. Additional information on the securities mentioned in this report is available upon request. Friedman, Billings, Ramsey & Company, Inc. is a market maker in PSINet. This report is based on data obtained from sources we believe to be reliable, but is not guaranteed as to accuracy and does not purport to be complete. Because of individual client objectives, this report should not be construed as advice designed to meet the particular investment needs of any investor. Any opinions herein are subject to change. This report is not to be construed as an offer or the solicitation of an offer to buy or sell the securities herein mentioned. From time to time, this firm and/or its directors, officers, employees or members of their immediate families may have a long or short position in the securities mentioned in this report. These securities may be sold to or purchased from customers or other wise by this firm, its directors, officers, employees or members of their immediate families, as principal or agent. First Call Corporation - all rights reserved. 617/345-2500

To: david thor who wrote (1494)	11/12/1997 5:04:00 PM
From: Ken Turetzky	Read Replies (1) \| Respond to of 5650

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 ____________________________________________________________________________ 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 ____________________________________________________________________________ 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 ____________________________________________________________________________ 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) ____________________________________________________________________________ @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.