WorldCom Acquires Intermedia, Buying Into Digex

In a bid to accelerate its growth in the Web-hosting marketplace, WorldCom Corp. Tuesday forged an agreement to buy telecommunications carrier Intermedia Communications Inc. in a deal valued at about $3 billion in cash and stock. WorldCom will also assume Intermedia’s roughly $3 billion debt.

Intermedia is a provider of voice and data services and is listed as one of the United States’ top independent competitive local exchange carriers.

Intermedia was an attractive target for WorldCom not so much for its 14 local markets — WorldCom is already in eight of those — but because of its controlling interest in Digex Inc. , a provider of managed Web and application hosting services. Through the merger, WorldCom will acquire Intermedia’s approximately 55 percent stake in Digex’s equity interest and 94 percent control of Digex’s voting interest. Still, Bernard J. Ebbers, president and chief executive officer of WorldCom, said Intermedia itself will enhance WorldCom’s capability in the CLEC area and does provide significant assets.

Ebbers also said Digex would remain separate from UUNet, WorldCom’s Internet service provider unit.

“It will not operate under the UUNet brand,” he said. “Digex is a stand-alone, public company and will remain that way.”

Ebbers, noting that UUNet does not yet have the maturity to offer managed services, said Digex would provide WorldCom with network capability and connectivity at attractive pricing while WorldCom will make the 2 million square feet of hosting space it is currently adding available to Digex on a priority basis. WorldCom’s sales force will sell Digex products and services.

Brian Brewer, WorldCom’s vice president of Marketing, added that WorldCom and Digex will initially bundle the offerings they already have, but will probably expand into new areas as opportunities arise.

“Market requirements are changing every day,” Brewer said. “We expect that there will be opportunities that neither of us offer today or could have brought to the market alone.”

WorldCom said the new relationship with Digex and the merger with Intermedia would allow it to:

  • Combine Digex’s range of managed, enterprise and portal hosting solutions with WorldCom’s network and relationships with businesses around the world
  • Provide WorldCom and Digex customers with a more complete portfolio of products and services to stimulate growth of their e-businesses
  • Build WorldCom’s e-business talent pool
  • Focus capital investments in the Web-hosting market, one of the industry’s fastest growing segments
  • Improve WorldCom’s local presence through strategic integration of Intermedia’s network facilities.

“With this merger, WorldCom accelerates by 12 to 18 months our ability to provide world-class managed Web and application hosting services — one of the highest growth markets in the industry,” Ebbers said. “WorldCom and Digex will offer an unmatched, comprehensive suite of access, transport and applications solutions to customers around the globe. Additionally, Intermedia and Digex employees will prove to be the most important assets we gain through this transaction.”

Ebbers added that the acquisition would generate organic, internal growth for WorldCom in the form new sales and revenue.

The boards of WorldCom, Intermedia and Digex approved the deal on Sept. 1. Under the terms of the agreement, each share of Intermedia common stock will be exchanged for $39 of WorldCom common stock, subject to a collar. Each share of Intermedia preferred stock will receive WorldCom preferred shares with terms “essentially identical” to the Intermedia preferred shares, according to the companies.

The actual number of WorldCom common shares to be ex

changed for Intermedia common shares will be based on the average trading prices prior to the closing with the caveat that it will not be less than 0.8904 shares (should Worldcom’s average stock price exceed $43.80) or more than 1.1872 shares (if WorldCom’s average stock price falls below $32.85). If the exchange ratio is higher than 1.0685, WorldCom has reserved the right to pay the difference between the exchange ratio and 1.0685 in cash.

The merger is still subject to shareholder approval and approvals from the U.S. Department of Justice, Federal Communications Commission, and various other governmental authorities. The merger is expected to close early in 2001.

This is WorldCom’s first major move since its purchase of Sprint Corp. collapsed due to regulators’ concerns.

Ebbers said WorldCom does not anticipate regulatory troubles in the Intermedia merger.

“We see no regulatory issues that we want to address up front in this transaction,” he said.

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