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RealTime IT News

Consolidation Prize? Verio Aims To Buy Bigness In Business

At a time when Internet service provider (ISP) stocks are a hit and miss bunch with investors, here comes an initial public offering from Verio. Is it late to the prom or early to the next dance?

Since its inception in March 1996, Verio's goal was to become the leading full-service national provider of Internet connectivity offering enhanced Internet services to small- and medium-sized businesses. Not a new idea. UUNet, PSINet, USWeb, and others aim to provide all or many aspects of that same service.

PSINet (NASDAQ:PSIX) trades at under 2x revenue on a forward basis. The bearded ladies investment club can't even wind up a modem for that one. The difference is that Verio, backed by some cable and communications-savvy venture funds and directors with cable TV experience, seems to be using the old cable TV operator model to consolidate regional players into a national presence with plenty of capital to do so. This includes a $100 million bank line, $150 million 13 1/2% Senior Notes due 2004, preferred stock structures to acquire regional ISPs and bring them to Wall Street under the Verio banner, and public capital forthcoming with this IPO.

While terms of the shares offered and share outstanding pro forma are not yet shown in these early filings, we think Verio may be seeking a valuation of between $200 million to $300 million out the gate. Historically, Verio generated $35.7 million revenue for 1997 but pro forma its mergers and acquisitions for all or majority of a slew of regional ISPs revenue would have been $78 million.

If we annualize the latest quarter (ending Dec. 31, 1997) Verio would generate $90 million revenue. On a 2x or 3x multiple we're in the valuation range noted above, a slight premium to the PSINet's of the world but in line with the Concentric Networks (NASDAQ:CNCX), which targets many of the same areas that Verio wants to.

Verio provides Internet services to over 80,000 customers in 33 of the top 50 U.S. metro areas including: 5,000 dedicated connectivity customers; 12,000 Web hosting or Web site server co-location customers; 35,000 domains (i.e. Verio.net) hosted; and 60,000 remaining customers on business-focused dial-up connectivity services.

>From March 1996 through September 1997, Verio's strategy was to acquire 51% to 100% of a large regional ISP, and a minority interest in smaller ISPs within each region. The new game is 100% ownership, consolidating management teams, network operations, and marketing efforts within various regions.

As of December 31, 1997, Verio acquired four of its initially non-wholly owned ISPs and plans to buy all but two of the remaining ISPs that it owns less than 100% in a cash-stock combo. Verio expects to incur costs of $45 million to $50 million in connection with the acquisition of the remaining interests in these ISPs.

Executive officers as a group own 3% before the IPO. Pre-public majority equity is held by Brooks Fiber at 22.76%; Norwest Equity Partners, 20.98%; and Providence Equity Partners, 14.9%.

While Verio looks like it found a huge potential market with more than seven million small- and medium-sized businesses in the U.S., and perhaps 10% of them on the Web in two years, we think that reaching them through various local ISPs will be the hardest part of Verio's strategy.

In a world where Internet access is just a phone call or mouse click away from anyone signing up with a rival service at the slightest hint of user frustration, that customer service becomes either the weakest or strongest link in the value chain.

With its consolidation quest and nearly 4,000 ISPs vying for eyeballs and wallets, Verio could be the consolidation king in a market ripe for it, or at least for someone to play the pied piper.