Wholesale: Verizon Axes NorthPoint Merger

Posted: 01/2001

Verizon Axes NorthPoint Merger
By Josh Long

Verizon Communications hoped to conceive a broadband giant after announcing
plans last summer to merge its DSL assets with NorthPoint Communications, Inc.,
in 2001.

The deal could have propelled NorthPoint (www.northpoint.com)
into profitability as the new broadband company was expected to begin operations
with 600,000 DSL lines and a broadband network passing 63 million homes and
businesses in 163 U.S. metropolitan statistical areas.

But Verizon Communications (www.verizon.com)
had a change of heart last fall. Citing the deterioration in NorthPoint’s
business, operations, and financial conditions, Verizon announced it was pulling
out of the deal.

NorthPoint’s revision of third-quarter results, which recognized delinquent
debts and, consequently, greater losses than initially reported, preceded
Verizon’s announcement.

NorthPoint was stunned. Company executives say Verizon had no right to ax the
agreement.

"We do not believe that Verizon is entitled to terminate either the
merger agreement nor its agreement to provide interim financing," said
NorthPoint President and CEO Liz Fetter during a national press conference a day
after hearing the bad news.

"However, we will not be commenting on legal positions in this call
since these issues will be subject to legal actions in the very near future and
it would not be appropriate to comment now," Fetter said during that
teleconference.

But Verizon says it has every right to withdraw its merger plans. It explains
that a binding agreement hinged on whether NorthPoint’s business, operations,
and financial condition remained materially the same as they were when the
agreement was signed.

On Nov. 20, NorthPoint revised its third-quarter financial results, changing
its reported revenue from $30 million to $24 million. NorthPoint reported
third-quarter EBITDA losses at $90.9 million.

Verizon explained that the continuing decline in revenues, an erosion of its
customer base, an increase in expenses due to write-offs for increased bad debt,
and a material increase in net losses.

The merger agreement stipulated that Verizon would make an $800 million cash
investment, including $200 million in interim financing. Verizon will retain the
$150 million in convertible stock it purchased in September.

Verizon says it would meet its out-of-region commitments, which were
contingent on its merger with GTE Corp. Its DSL plans include the acquisition of
one point Commu-nications Corp. (www.onepointcom.com)
and its strategic relationship with Metromedia Fiber Networks Inc. (www.mmfn.com).

Fetter said NorthPoint is looking at various funding options, including
equity investments from strategic investors. The company also has entered
discussions with its bank syndicate on drawing up to $165 million in available
funds.