WorldCom wins race for Digex

Telecom giant to pay $6 billion for control of hot Beltsville firm

Two other suitors

Web-host company has seen shares rise almost 200% in year

Telecommunications

September 06, 2000|By Mark Guidera | Mark Guidera,SUN STAFF

WorldCom Inc. emerged yesterday the winner in a fierce bidding war to gain control of Digex Inc., the Beltsville company that's considered one of the crown jewels of the emerging Web-hosting industry. The telecommunications giant is paying $6 billion for the prize.

WorldCom won control by buying troubled Intermedia Communications Inc., which owns 55 percent of Digex, its most valuable asset.

WorldCom, of Clinton, Miss., will pay a premium price of $39 a share, or about $2.9 billion, for Intermedia, of Tampa, Fla. Intermedia shares rose $8.61, or 38 percent, closing at $31.48 on the Nasdaq stock market. That is still more than $8 shy of the merger offering price.

WorldCom shares dropped $3.19, or 9 percent, to $33.75 yesterday on the Nasdaq.

WorldCom not only gets 55 percent of Digex's equity but 94 percent of the company's voting interest. The merger, expected to close early next year, will end up costing about $6 billion because WorldCom will assume Intermedia's $3 billion debt.

The boards of the three companies have approved the merger but the deal still must be approved by shareholders and federal regulators.

In buying Digex, WorldCom will be gaining a leader in the emerging field of managing business Web sites as corporations increasingly look to outsource the complex task.

"WorldCom has been looking to get into this space for quite some time," said Todd C. Weller, a Reston, Va., industry analyst with Legg Mason Wood Walker. "With Digex, they get the considerable people skills and processes needed to do it right."

Weller predicts that the deal is a sign of more industry consolidation on the horizon.

At least two other companies, Global Crossing Ltd. and Exodus Communications Inc., had attempted to gain control of Intermedia's stake in Digex since the Florida company hired Bear, Stearns & Co. in July to help sell its Digex holdings.

Both those overtures, which included a reported Exodus offer of $120 a share for Intermedia's shares of Digex, were rejected by Intermedia's board.

WorldCom gains a big stake in Digex at a considerable discount. But Digex shares took a beating yesterday. Shares dropped $16.62, or 20 percent, to close at $67.88 on the Nasdaq.

Before yesterday, Digex shares had risen almost 200 percent since September 1999 and it had a market capitalization of $5.3 billion. Intermedia shares declined 14 percent in the same period and it had a market cap of $1.3 billion.

Weller, the Legg Mason analyst, said Digex shares were beaten down by fleeing speculators who bought the stock hoping for a big score after Intermedia's announcement in July that its Digex holdings were for sale.

In the long term, he said, the deal should prove advantageous for Digex.

"WorldCom is the much better parent. It's better funded, has a much larger sales force by a factor of at least 10, and has the significant capital resources needed to compete in the Web-hosting business," said Weller.

Intermedia, which provides local phone service to businesses in the Southeast, bought Digex in 1997 for $13 a share, or $150 million, as a way to get into the growing Web-hosting and management industry.

The phone company sold a stake in Digex on July 31, 1999, when it spun off Digex as a separate, publicly held company. But it retained 94 percent voting control of Digex, which employs 1,200 nationwide, 800 of them at the Beltsville headquarters.

Bernard J. Ebbers, World- Com's president and chief executive officer, told a news conference yesterday that Intermedia would not have been worth buying without Digex.

The lure of Digex is its expertise and leadership position in setting up and managing, or "hosting" Web sites for businesses at its two data centers, and its expertise in Web site security, he said.

Among the company's 550 clients are a Who's Who of industry, including Ford Motor Co., Sony Corp., Forbes and Universal Studios. Digex's revenue has risen to $70 million in the first six months of this year, compared with $22 million in the like period last year.

Ebbers said the Digex stake will speed his company's planned expansion into Web site hosting services and applications sector by 12 to 18 months, part of its effort to reach the digital generation.

"This is a very significant transaction for us," noted Ebbers, saying the deal leaves WorldCom poised to move in "a very significant new direction."

He said the companies would work together to create new products and services, though he said plans for those were incomplete.

Ebbers said Digex, which lost $60 million on $70 million in sales in the first six months of this year, will remain an independently run company. No management or other changes are expected, Digex executives said.

Mark Shull, president and chief executive officer of Digex, said in an interview yesterday that a Digex relationship with WorldCom makes "a lot of strategic sense for us."

For one, he said, Digex gains access to WorldCom's global Internet network. WorldCom's UUNET Technologies Inc. operates one of the world's largest networks for carrying data over the Internet.

Also, said Shull, Digex will gain access to WorldCom's growing network of data centers - 28 by year's end - and the considerable financial resources needed for building and upgrading Web-based hosting network centers.

Bloomberg News contributed to this article.

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