CNET también está disponible en español.

Ir a español

Don't show this again

Tech Industry

2HRS2GO: No thrill in Verizon-NorthPoint

This morning's announcement from Verizon Communications (NYSE: VZ) and NorthPoint Communications (Nasdaq: NPNT) doesn't bode well for people hoping for a big, quick payoff from DSL stocks.

There isn't much to say about Verizon. It's already divesting one Internet business, Genuity, and today's deal essentially spins out another one to NorthPoint. Verizon still has a data transmission business, which has been growing at more than 30 percent year-over-year in recent quarters.

Verizon's stock price was down more than 10 percent after four and a half hours of trading today. Shareholders of Verizon are troubled because the company won't make as much money as expected over the next two years.

The company told analysts to drive their 2001 estimates down into the range of $2.90 to $2.94 per share, excluding special charges. That's up to 17 percent below First Call's previous consensus estimate of $3.50 per share, although Verizon says that if you calculate the separate guidances last year from Bell Atlantic and GTE, you would see the companies predicted 2001 earnings of $3.25 per share.

Either way, Verizon's new bottom line outlook is lower.

Just as important, Verizon investors can't be too happy about losing two cutting-edge businesses, at least for now. Verizon has said it wants to bring back Genuity as soon as possible, but the company had to be spun out to get approval for the Bell Atlantic-GTE merger.

But the DSL business probably won't be back anytime soon, even if Verizon will own more than half of the new NorthPoint.

"We've essentially allowed Verizon and NorthPoint to get together so that we can essentially be the number one DSL provider on a nationwide basis," Verizon Vice Chairman Larry Babbio said during this morning's conference call.

Not quite. NorthPoint can be the number one DSL provider. Verizon will be NorthPoint's largest shareholder, but the companies will be separately traded entities, basically. Or essentially.

The NorthPoint deal amounts to an admission that Verizon couldn't achieve its DSL targets on its own. It's a scary thing to hear from one of the largest, most cash-endowed communications companies in the world, but at least Verizon is passing the business onto a specialist.

Strategically, this is a fine deal for NorthPoint. It gets Verizon's not-inconsiderable subscriber base and, most important, a better relationship with its wholesale provider. And no one will complain about $450 million in operating cash.

Unfortunately, it's something of a letdown for NorthPoint shareholders. More than a few people bought DSL stocks hoping to be acquired, or at least end up as part of a large deal.

This isn't one, not from a financial point of view. If you're a NorthPoint shareholder, it boils down to a one-time divided of $2.50 per share. Wall Street won't get excited about that one, which is why NorthPoint's stock price remains down slightly today.

Verizon is a company undergoing a makeover, but don't kid yourself. As the current strike illustrates, Verizon remains one of those old-fashioned Regional Bell Operating Companies. They're a cautious bunch.

And that's why DSL investors might be leery of this agreement. If the Verizon-NorthPoint agreement serves as a model, you can't expect to get a large premium from any deal. After all, it's not likely that SBC Communications (NYSE: SBC) or BellSouth (NYSE: BLS) or Qwest Communications (NYSE: Q) will pay more than Verizon did. They may not even feel the need to carry out an acquisition -- their DSL goals aren't exactly the same.

At the same time, DSL companies like Covad Communications (Nasdaq: COVD) and Rhythms NetConnections (Nasdaq: RTHM) have to be wondering if this means NorthPoint customers will get precedence over theirs on the Verizon loop. The worry is especially acute when you consider the number of bad stories about Verizon's installations. Shares of Covad dipped slightly today, while Rhythms rose just marginally.

So consumers in the Northeast may be happy to see Verizon giving its DSL operations to a company focused on the field. And the bubbly executives on this morning's conference might be correct in saying this will jump-start the national rollout of DSL.

But Wall Street has no reason to be thrilled yet. 22GO>