Digex Inc., a Laurel-based Web-hosting company, took the first steps yesterday to put itself up for sale, with the consent of its majority owner, WorldCom Inc.
The company has formed a committee of independent directors and hired Boston investment bank Lane, Berry & Co. International to consider the sale of the company and other financial alternatives, Digex executives said yesterday.
"In recent months we've had various discussions with many clients about our financial structure, possible scenarios and potential changes," Digex chief executive George L. Kerns wrote in a letter to clients yesterday. "We've addressed many 'what if' questions, and this announcement confirms we are putting forth the right resources to evaluate our strategic options and help determine what's best for Digex and its constituents."
The company, which plans to report its third-quarter earnings today, is struggling to separate itself from WorldCom, which owns 61 percent of Digex's equity and controls 94 percent of its voting stock. Digex lost $192.5 million in fiscal 2001; it lost $119 million ($1.63 per share) in the second quarter of this year. That loss includes a one-time charge of $57 million and a $17 million reserve to cover funds WorldCom promised before it filed for bankruptcy protection -- funds that Digex doesn't expect to receive.
Digex has laid off more than 20 percent of its staff this year and closed international offices. Its shares hit a record low of 11 cents Oct. 11, compared with their 52-week high of $3.60 in November 2001. The stock closed yesterday at 35 cents, up 35 percent.
Just a month ago, the Digex board completed a near-total turnover of directors; it had been hampered for months this summer because six of its nine directors, including all three independent members, had resigned.
"Because we've gotten these new board members it's appropriate timing to formally put together this special committee," said Tania C. Almond, Digex's assistant vice president of investor relations.
WorldCom executives said in a joint news release that they backed Digex's search for funding alternatives, and Chief Financial Officer John Dubel said that WorldCom is committed to Digex's growth. Digex has borrowed at least $22 million from WorldCom this year and has bankruptcy court approval to borrow $10 million per month through the end of the year.
Analyst Andrew M. Schroepfer of Tier 1 Research, a Minneapolis-based industry research and consulting firm, said Dubel's statement is the first formal acknowledgement that WorldCom is supporting Digex's attempt to pull itself out of its parent company's muck.
"Since WorldCom's bankruptcy, everyone has known that Digex is dependent on WorldCom, and that has raised questions of a buyout of the whole company or a buyout of WorldCom's interests," Schroepfer said. "It's likely that the company [Digex] realized that its reputation has been damaged somewhat and it wants to try to resuscitate some of its momentum."
Ted Chamberlin, a senior analyst for market research firm Gartner Group in Stamford, Conn., said Kerns's letter and the formation of the committee is an attempt by Digex to shift its clients' focus away from the company's financial woes.
"They are trying to remind their clients that [although] they are in a bit of a financial pickle that doesn't stop them from doing what they do well," Chamberlin said.
Potential buyers include regional telephone companies such as Verizon Communications Inc., foreign telecoms such as Deutsche Telekom AG, and perhaps consulting companies such as Accenture Ltd. or BearingPoint Inc., Chamberlin said. Digex has data centers in Maryland, California and London, as well as offering technology, security and support services.
"They are very valuable assets in this market," Chamberlin said. "As soon as they are put on the block, I think we'll have a few suitors step up. They have good clients and intellectual capital."
Ultimately, Digex's future could still hinge on what happens at WorldCom. The company is in the process of appointing a new chief executive, who could have his or her own vision for Digex, Chamberlin said.