PSINet agrees to buy Va. firm

Transaction Network to provide option of electronic commerce

Internet services

August 24, 1999|By Kristine Henry | Kristine Henry,SUN STAFF

PSINet Inc., the Internet service provider that paid more than $100 million to get its name on the Baltimore Ravens football stadium, said yesterday that it has agreed to purchase Transaction Network Services Inc., a provider of high-speed data services for credit-card and automated bank-teller transactions.

The deal will allow PSINet, based in Herndon, Va., to offer electronic-commerce options to its customers.

PSINet will pay $22.50 and one-half share of its stock for every share of Transaction Network, which is based in nearby Reston, Va. The purchase price equals about $45 a share -- 31 percent more than Transaction Network's closing price Friday. The deal is worth a total of about $715 million, including the $10.6 million in debt PSINet will assume, said PSINet Chief Financial Officer Edward D. Postal.

Shares of Transaction Network jumped $9 yesterday to close at $43.25 while PSINet closed at $45.875, up 31.25 cents.

"The strategy is very good for PSI -- it benefits both parties, particularly PSI, because it is getting value added in the [electronic] solutions area," said Ulric Weil, an analyst at Friedman, Billings, Ramsey in Arlington, Va.

"Vanilla ISP [Internet service provider] is a commodity with prices going only one way, and that's down; in some cases it is free. This is not a good business per se unless you can show that you have a lot more than Internet service access."

Transaction Network should add $200 million to PSINet's revenue next year, Postal said, bringing it to between $900 million and $1 billion.

Earnings before interest expense, taxes, depreciation, amortization and other noncash items, or EBITDA, are expected to be between $150 million and $170 million, Weil said, with Transaction Network contributing $60 million of that.

"We all know PSINet is an acquisition candidate, and this [deal with Transaction Network] enhances their salability," Weil said. "The telecommunications market is increasingly a market for big, global players -- the AT&Ts, the Sprints, the MCI WorldComs -- and medium-sized companies find it tough going over the long haul."

The agreement with the stadium allows for one name change during the duration of the 20-year contract, said Robert Leahy, senior vice president for corporate marketing and communications at PSINet, although more changes might be possible.

"There is a tacit understanding that in the topsy-turvy world of mergers and acquisitions that there might be more than one change in 20 years," he said.

PSINet reported a loss of $262 million in 1998 on revenue of $260 million. Transaction Network earned a profit of $6.9 million last year with revenue of $102 million.

PSINet will pay for the cash portion of the acquisition, expected to close in the fourth quarter, with part of the $1.2 billion it raised last month selling high-yield bonds.

"I view it as a favorable transaction," said Daniel Zito, an analyst at Legg Mason Wood Walker in Baltimore.

"It's putting together PSI's global infrastructure with Transaction Network's processing capabilities, and as a result they will function as one corporate entity to provide bundled e-commerce solutions to a host of customers, largely retailers who are moving toward Web-based services to touch customers."

Both Zito and Weil rate PSINet stock a buy.

PSINet President and Chief Operating Officer Harold S. "Pete" Wills said the acquisition "enables PSINet to better access the $1 trillion marketplace for e-commerce services."

"The combined unit will serve 21 countries, processing over 20 million transactions daily from 2 million business users," he said.

"We will have a 70 percent market share in e-commerce transactions in the U.S. and a rapidly growing international presence. We'll be able to provide bundled services, providing our customers with the most robust solutions ranging from Internet, Web hosting and e-commerce."

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