Following News From Concentric, All Eyes Turn to PSINet

SAN FRANCISCO -- In the fast-consolidating broadband business, PSINet (PSIX Quote) is watching the value of its potential takeout price soar -- and making some shrewd calculations about maximizing the opportunity.

Rivals of the Herndon, Va.-based data carrier have made it easy by consolidating and reducing the number of targets. PSINet's peer Concentric (CNCX Quote) disclosed plans on Monday to merge with the fiber-optic and wireless carrier Nextlink Communications (NXLK Quote). The cross hairs now fall on PSINet, according to both analysts and the company itself. The stock has jumped to 80 Thursday from 56 3/4 on Jan. 6, on anticipation of strong results in the fourth quarter and on speculation of a takeover.

Recent deals "cause one to wonder whether PSINet is the next logical takeover candidate," says equity analyst Frederick Moran with investment bank Jefferies & Co., which isn't an underwriter for PSINet. He rates PSINet shares buy. PSINet is growing more rapidly than Concentric, and its rival Verio (VRIO Quote) focuses more narrowly on Internet access and Web hosting. So PSINet stands out as "the only independent, diversified provider of Internet" services.

PSINet refers to itself as the "Internet Super Carrier." It shuttles Internet traffic for wholesale and retail customers via fiber-optic networks and satellites. PSINet now predicts its revenue will roughly double to $1.1 billion in 2000 from the prior year, thanks in part to explosive demand for its Web-hosting services. On Sept. 30, PSINet served nearly 80,000 business accounts globally. It carried Internet traffic for 1.2 million customers, both directly and through other ISPs. Perhaps nobody believes in PSINet's value more strongly than its candid CEO, William Schrader.

"We think we're a very attractive takeover candidate," Schrader says, who founded the company in 1989. "We have had some very interesting conversations with nearly every major telephone company in the world" about potential partnerships. He also doesn't rule out pairing his network operations with a content company, somewhat akin to the America Online (AOL Quote)-Time Warner (TWX Quote) combination announced this week.

While PSINet is "not for sale," Schrader has given the possibility some real thought. His company has taken steps to ensure potential acquirers are both cordial and generous. In November, his company strengthened its 3-year-old "poison pill" for any unwanted partner who buys more than a fifth of PSINet. Shrader wanted to be prepared for a possibility he admits is unlikely: "If someone goes hostile, we can force them to pay 275 a share."

Schrader says that by waiting, PSINet might be able to attract more potential bidders. Regulators are permitting Bell Atlantic (BEL Quote) to branch into the long-distance calling business. As other local phone companies follow, Schrader says, they might see PSINet as a path into new markets.

The proverbial back of the envelope supports Schrader's enthusiasm for his company's value. Nextlink is paying $2.9 billion in stock and the assumption of debt for Concentric -- nearly twice its current market capitalization. The price, subject to a trading collar, equates to roughly 12 times the revenue Concentric is expected to achieve in 2000.

"Applying CNCX acquisition metrics to PSIX would result in a stock price of $97-112," equity analyst Harry Blount with Donaldson Lufkin & Jenrette wrote in a research note this week. Blount, whose firm has acted as underwriter for PSINet, rates the stock a "top pick." He was unavailable for comment, but wrote "we believe it is matter of when, not if, PSIX becomes a target."

PSINet has been a rather manic shopper itself, plucking 14 ISPs in the December quarter alone. Tuesday, PSINet announced the acquisition of privately held ISP Zebra.Net of Mobile, Ala., for an undisclosed price.

And as it considers larger merger scenarios, PSINet can exploit the enthusiasm that has pushed its stock to 75 from 10 in mid-1998. "A year-and-a-half ago you could have walked into Shrader's office and offered 25 a share, and you would have owned the company," says one equity analyst who asked not to be named. The analyst's firm has acted as investment banker in a transaction involving PSINet.

An ideal mate for PSINet might be Level 3 Communications (LVLT Quote). The analyst says the companies would benefit from combining their similar e-commerce, Internet-based services. Officials at both companies declined to comment on the possibility.

One unappealing aspect of PSINet as a takeout candidate, to be sure, is its debt load. Debt ballooned to $2.5 billion on Sept. 30 from $1.1 billion on Dec. 31 as PSINet invested heavily in its network infrastructure. PSINet's long-term debt is a higher portion of its market cap than for peers such as Concentric and Verio. Moran says this is not a problem because PSINet has increased its cash hoard to $1.7 billion, up from $485 million.

And in this merger-crazed telecommunications sector, acquirers tend to focus more on network pipes and revenue than on debt or net losses.