September 02, 2003
Digex Backs MCI Bid
Digex is recommending that shareholders accept MCI's bid to acquire the common stock of the managed hosting company it doesn't already own for 80 cents a share. Some shareholders are grumbling about the valuation, given that publicly-held providers are trading at higher share prices. But Digex apparently had received only one other firm offer, which placed a far lower value on the common stock, according to the valuation report from its advisor Lane Berry & Co.
MCI owns a controlling stake in Digex, which wasn't included in the MCI/WorldCom bankruptcy filing but placed itself for sale late last year. Lane Berry, which Digex hired as a strategic advisor, concluded that MCI's offer represented a fair value for Digex, saying higher share prices for competitors Globix, Interland, SAVVIS and NaviSite were based on future expectations, rather than current value. Another factor was a lack of competing bids.
"Beginning in October 2002, Lane Berry conducted a sales process for Digex, contacting over 120 potential buyers," Digex reports in its SEC filing. "After receiving preliminary indications of interest, five of these parties were invited to conduct further due diligence on Digex, consisting of a management presentation, facility tour and access to additional financial, legal and business information.
"After this due diligence period, one party submitted a formal proposal which provided for a purchase price of $0.23 per share for the Common Stock, assumption of Digex's capital lease obligations, a $35 million senior secured note to MCI in settlement of its debt claims and the redemption of the Series A Convertible Preferred Stock."
Digex shareholders on message boards have panned the MCI offer, saying it undervalues the company. Perhaps they should consult the many investors in common stock of hosting companies who have wound up with nothing. With the only other bid valuing common shares at 23 cents, Digex shareholders may want to stop griping about MCI's offer.
Lane Berry did a lame job on the evaluation. They compared the stock prices of Digex's competitors, found that the Worldcom bid was embarrassingly low in comparison, then ignored the data, stating the other companies were all overvalued by the stock markert. They were also dead wrong in commenting that Digex did not have EBITDA positive earnings for the last year. The last 4 quarters were all positive to the tune of $11 million. Digex still has over $100 million in PPE yet Worldcom is offering only $20 million for the stock.
No mention of the fact that Worldcom's fraud caused Digex to lose customers, or that Worldcom's failure to pay the $90 million it owes Digex has depressed the value of Digex.
No mention that Worldcom fired previous management,who claim in court documents to have obtained financing for Digex, and replaced them and the independant directors with their own hand picked people. No mention that Digex has not had a shareholders meeting for over a year or had conference calls for analysts. Digex itself will not comment on the errors in Lane Berrys report due to advice from their lawyers.