NorthPoint crumbles amid Verizon news, rare ''sell'' ratings

News that Verizon was pulling the plug on a proposed merger with NorthPoint left shares of the DSL company battered Thursday. Analysts gave NorthPoint a rare "sell" rating and said it is quickly running out of cash.

Shares of Northpoint (Nasdaq: NPNT) plummeted 69 percent, down 1.38 to 63 cents. The stock had posted a 52-week high of 34.75. For its part, Verizon's (NYSE: VZ) shares inched up 56 cents to 56.38.

The bloodletting with NorthPoint was caused by news that Verizon Communications was canceling its $800 million agreement to buy a 55 percent stake in NorthPoint due to the latter's poor financial shape. The failed deal, first announced in August, would have merged the companies' digital subscriber line (DSL) businesses.

According to Verizon, the deal was scrapped due to a "material adverse change" in the financial state of NorthPoint's finances. Earlier this month, NorthPoint was forced to lower its third-quarter financial results after it discovered some of its customers may not have the money to pay their bills, a trend seen recently throughout the DSL sector.

Verizon contends that this entitles it to cancel the merger pact without having to pay a break-up fee. NorthPoint, on the other hand, argues that Verizon was not entitled to terminate the agreement and, according to NorthPoint Chief Executive Liz Fetter, the company is exploring its legal options.

The contrasting effect on the companies could not be more stark.

Verizon today raised its earning forecast, with profits now expected to grow about 8 percent in 2001 and 12 percent in 2002.

For NorthPoint, the withdrawal of badly need cash from the defunct merger leaves the company in a serious financial crisis. Analyst reaction was swift.

RBC Dominion Securities analyst David J. Bank cut NorthPoint to "sell" from "neutral," stating that he believes the termination of the Verizon deal leaves NorthPoint in a "severe liquidity crisis from which it is unlikely to extricate itself as an independent going concern." In his research note, the analyst concluded that he believes NorthPoint's current resources won't get the company past the first quarter of 2001.

NorthPoint was also downgraded to "sell" from "accumulate" by analyst Dan Ross at Sanders Morris Harris.