Posted 01/2000
Front Page
Verizon Backs Out of NorthPoint Deal
By Gail Lawyer and Kim Sunderland
Verizon Communications Inc. (www.verizon.com) terminated its merger agreement with NorthPoint Communications Group Inc. (www.northpoint.net), as a result of the apparent deterioration in NorthPoint's business, operations and financial condition.
Larry Babbio, president and vice-chairman of Verizon's Telecom Group, cited NorthPoint's restatement of third quarter 2000 results as one of the main reasons for the telco's decision to call off the merger. NorthPoint reported earlier this month that, as a result of some of its customers' inability to pay for services, its third quarter revenues were actually closer to $24 million than the $30 million it originally reported on Oct. 26. EBITDA losses also changed in the restatement of third quarter figures, growing to $90.9 million vs. the previously reported $79.2 million.
"We regret the termination of the merger with NorthPoint," Babbio said during a press conference discussing the financial impact of canceling the agreement. "However, we remain focused on our DSL strategy."
Verizon reported that its earnings per share for 2001 will grow approximately eight percent, compared with the 5 to 6 percent it was expecting as a result of dilution caused by the NorthPoint merger. Earnings per share will range from $3.13 to $3.17 per share, compared to the $3.06 to $3.10 per share it initially expected as a result of the NorthPoint deal.
As for its DSL strategy, Babbio says it will meet the out-of-region commitments, which are required as part of its merger with GTE Corp. (www.gte.com), through a variety of means. Among its DSL plans are synergies created by its acquisition of OnePoint Communications Corp., and its strategic relationship with Metromedia Fiber Network Inc. (www.mmfn.com).
As a result of the cancellation of its agreement with NorthPoint, Verizon is under no obligation to provide the DSL company with the $200 million in financing it had promised. Verizon, however, will keep the $150 million worth of NorthPoint's convertible stock it purchased in September.
"I am stunned to get the news after months of conversation with Verizon on the strong business opportunities available to the combined entities," Liz Fetter, NorthPoint's president and CEO, said after finding out that Verizon had called off the planned merger. "Verizon was not entitled to terminate these agreements, and we are exploring all our options, including funding options and legal remedies."
The two companies had agreed to merge their digital subscriber line (DSL) businesses Aug. 7, but NorthPoint has been struggling financially ever since. As a result, Verizon claims that it doesn't have an obligation to arrange for NorthPoint to receive additional financing, according to company executives.
The merger agreement, which was slated for completion later this year, called for the companies to combine their DSL businesses, including selected assets and personnel, to form a national broadband company. (See "DLEC Buyups: Rescue or Ravishment" October 2000 xchange).
Under the terms of the agreement, Verizon says that its obligation to complete the merger was conditioned upon NorthPoint's business, operations and financial condition each remaining materially the same as they were at the time the agreement was signed.
NorthPoint recently reported a continuing decline in revenues, an erosion of its customer base, an increase in expenses due to write-offs for increased bad debt, and, as a result, a material increase in net losses.
Verizon said that given the material adverse changes, it terminated the agreement as permitted under the terms of the contract.
NorthPoint remains committed to its basic business fundamentals and the overall opportunities available in the DSL marketplace, Fetter said..
As of xchange's press time, NorthPoint was scrambling to control the fallout resulting from Verizon's decision. The day after the Nov. 29 announcement, NorthPoint's stock lost almost 80 percent of its value. In a brief press conference on Nov. 30, Fetter said that despite the loss of Verizon's $200 million financing commitment, NorthPoint still had $150 million of capital to work with. The company is also looking at an option of using its remaining $165 million bank facility. Fetter noted that the company is currently not in default of any of its bank facilities.
Now NorthPoint's focus is on financing, operations and strategy, Fetter said. "I'm confident we have a management team in place to work through the current situation and built a strong future for NorthPoint," she said during the news briefing.
