62% stake in Digex put on the block

Ailing Intermedia Communications selling `crown jewel'

Telecommunications

July 19, 2000|By Mark Guidera | Mark Guidera,SUN STAFF

Digex Inc.'s majority shareholder has put its 62 percent stake in the Beltsville-based Web-hosting and management company up for sale, and analysts speculate that the list of potential suitors fighting over it could soon read like a Who's Who of the telecommunications industry.

Intermedia Communications Inc. of Tampa, Fla., which provides businesses with telephone and other communications services, has hired investment house Bear, Stearns & Co. to orchestrate a deal for its stake in Digex. The announcement came on the heels of Intermedia disclosing that it expects to miss revenue estimates for its second quarter and full year by 10 percent to 15 percent.

Analysts speculate that likely suitors could include telecommunications giants or even Digex competitor Exodus Communications Inc. No company has said publicly that it is interested in a deal.

"Intermedia's decision to sell their stake is no reflection on the performance of Digex. It's one of the crown jewels of the Web-hosting industry," said Todd C. Weller, an Internet industry analyst with Legg Mason Wood Walker Inc. in Baltimore.

At yesterday's closing share price of $84.5625, Intermedia's stake in Digex is worth more than $3 billion, analysts estimated. Digex shares fell $9.4375, or about 10 percent, yesterday. Analysts blamed profit-taking for the tumble.

Intermedia, which provides telephone exchange and data transmission services to businesses, bought Digex in 1997 for $13 a share, or $150 million, as a way to get into the growing Web-hosting and management industry.

Intermedia turned around and sold a stake in Digex on July 31 when it spun off Digex as a separate, publicly held company. It retained 95 percent voting control over Digex, which employs 1,200 nationwide, 800 of them at the Beltsville headquarters.

The initial public offering price was $17 a share. Since then, shares have closed as high as $184 in March, a month after Intermedia sold an additional 10 million shares. The February secondary offering raised $90 million.

Alice Andors, a spokeswoman for Digex, said company executives were declining to comment on Intermedia's decision to sell its stake and whether any buyers had stepped forward.

Adam Hill, a spokesman for Intermedia, said the company decided to sell its stake because Digex does not fit in with its "core focus" of providing primarily telecommunications services to businesses.

Analysts believe that Intermedia also wants to sell off its Digex stake to raise cash so it can reduce its $2 billion in debt.

Weller at Legg Mason, who sees Digex moving into break-even territory late next year, said he believes that a variety of potential buyers will express interest in Digex. It posted a net loss of $26 million on $28 million in revenue in its first quarter, which ended March 31. Revenue tripled from the like quarter last year.

Along with big telecommunications players such as AT&T Corp. and emerging long-distance and Internet services players such as Qwest Communications International Inc., a company such as computer chip giant Intel Corp., which has been buying stakes in Internet services companies, might come forward to make a bid, Weller said. A European telecommunications company also might decide to pursue Digex.

Why the potential for such strong interest? Growth prospects, analysts said.

The Yankee Group, a technology consulting firm in Cambridge, Mass., estimated that the market for Web services will balloon to $14.4 billion in the next four years, up from $4.4 billion estimated to have been spent on such services in 1999.

Legg Mason predicted an offering price for Digex shares in the $110 to $120 range, while A. G. Edwards forecast $105 a share.

Weller said it could be several months before any firm offer is announced. "Intermedia's not looking for a fire sale here," he said.

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