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.
