NorthPoint, Verizon form broadband venture

Broadband service provider NorthPoint Communications today inked an agreement with Verizon Communications to merge their digital subscriber line businesses to form a new broadband communications company.

NorthPoint, which was rumored to be planning

Gartner analyst John Pultz says that after its latest deal closes, Verizon Communications will come close to becoming a nationwide provider of digital subscriber line service to businesses and consumers. see commentary

a partnership announcement, is a provider of digital subscriber line (DSL) service, which allows existing telephone wires to carry ordinary phone traffic and high-speed Internet services simultaneously. The company's stock has recently flirted with its 52-week low, making it an attractive buy.

Under the agreement, the two companies' DSL businesses will be combined to create a new company, carrying the NorthPoint name, that will aim to provide a broader set of services in the high-speed, or "broadband," market to consumers and businesses. NorthPoint will also receive an $800 million cash investment from Verizon, the companies said.

News of the deal boosted NorthPoint shares. Shortly after the opening bell, the stock rose $1.13, jumping nearly 8 percent, to $16.13 on volume of 1.9 million shares. Meanwhile, shares of Verizon were down $4.38, slipping 9 percent, to $43.50.

"(This deal) makes the one credible nationwide backbone for DSL services immediately," said Meta Group analyst David Willis. "The new company will give them a lead above any of the other offerings for nationwide DSL service," such as leaders Qwest Communications International and SBC Communications, he said.

Verizon, the nation's largest local and wireless telephone company, was formed in June by the merger of Bell Atlantic and GTE.

In addition to combining the companies' DSL networks, the merger will combine both companies' products, technology, strategic partnerships and management. NorthPoint chief executive Liz Fetter will continue to lead the new NorthPoint as CEO following the close of the deal. The new NorthPoint team will include management from both companies.

The agreement also calls for Verizon's Internet service provider unit, Verizon Online, to resell NorthPoint's DSL service nationwide.

Analysts approve, but are wary
"The combined company is going to have the largest footprint of all the DSL providers," said Dan Ross, an analyst with investment firm Sanders Morris Harris.

Ross, who rates NorthPoint's stock a "strong buy," said the deal was a necessary move for NorthPoint, which had hit its poorest financial state to date. With Verizon on its side, NorthPoint will be able to jump-start its marketing efforts and expand beyond its existing territory, especially with Verizon reselling NorthPoint DSL service, he added.

However, Meta Group's Willis said that this deal poses a dramatic shift for NorthPoint's wholesale business approach and will change its existing relationships with ISPs such as UUNet and Verio.

NorthPoint leases phone lines from the Baby Bell local phone companies, then sells them as high-speed Internet access lines to ISP partners that, in turn, sell them at retail prices.

"If Verizon Online becomes the preferred provider for NorthPoint DSL service, then that is certainly going to hurt its existing ISP relationships," Willis said. "(The merger agreement) is a very expensive deal for Verizon and potentially diminishes some of the strengths NorthPoint has, meaning its existing wholesale relationships and its focus on business-class customers.

"The big question is whether or not Verizon can pull this off without fundamentally changing what NorthPoint does," he added.

NorthPoint is one of several competitive local phone companies that are primarily offering high-speed Internet connections to businesses and consumers.

The company is part of a trio of upstarts, including Covad Communications and Rhythms NetConnections, that went public in early 1999. Like its rivals, NorthPoint has been caught up in a race against the Baby Bells to install DSL in the nation's largest cities. The highly competitive broadband market has been dominated by the cable industry and services companies such as Excite@Home and Road Runner.

Northpoint, Verizon report earnings
In conjunction with the Verizon merger deal, New York-based NorthPoint released second-quarter results today that matched Wall Street estimates. NorthPoint said its second-quarter net loss came in at $112 million, or 85 cents a share, compared with a loss of $37.9 million, or 44 cents a share, in the same period a year ago. Analysts polled by First Call/Thomson Financial expected the company to lose 85 cents a share.

The company blamed its greater loss on efforts to rapidly expand its network and the implementation of a new software and customer support system, which has suffered from a few glitches.

Revenues for the quarter increased to $24.4 million from $2.5 million in the comparable period a year earlier. NorthPoint said its DSL subscriber base grew 50 percent in the second quarter to 62,000 from 41,300 as of March 31, 2000.

Verizon today reported second-quarter results that fell short of Wall Street expectations. The company posted profits of $1.97 billion, or 72 cents a share, for the quarter, compared with $1.87 billion, or 67 cents, a year earlier. Analysts polled by First Call expected the company to earn 83 cents per share.

Following the close of the merger, the new company will trade as a separately listed public company on the Nasdaq exchange and will continue to report financial results. The new NorthPoint's financial results also will be consolidated into Verizon's results for financial reporting purposes.

Under terms of the deal, the new company will receive an $800 million cash investment by Verizon. Of the investment, $450 million will be used to fund the new company's capital expenditures and operations, the companies said. NorthPoint shareholders will receive the remaining $350 million in cash, or approximately $2.50 per share. The actual per-share amount will be based on the number of outstanding NorthPoint shares and warrants as of the closing date of the transaction.

In addition, NorthPoint shareholders will also receive one share in the new company for each share held as of the closing date of the deal. As a result, Verizon will own 55 percent of the new NorthPoint, while existing NorthPoint shareholders will own 45 percent. The merger agreement has been approved by the boards of both companies.

NorthPoint, whose investor list includes Intel, Microsoft, @Work and Frontier, said the Verizon deal is subject to regulatory approvals and the approval of its shareholders. Shareholders representing approximately 48 percent of the outstanding shares of NorthPoint have agreed to vote their shares in support of the merger. Both companies said they expect the transaction to close by mid-2001.