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Intermedia, WorldCom revise deal

The new arrangement seeks to appease angry Digex shareholders, who complained they had been shortchanged.

By JEFF HARRINGTON

© St. Petersburg Times, published February 16, 2001


TAMPA -- Shareholders of Intermedia Communications Inc. are on the short end of a renegotiated deal to sell the Tampa telecommunications company to WorldCom Inc.

The companies late Thursday confirmed they changed terms of their merger to settle litigation by shareholders in Digex Inc., an Intermedia-controlled subsidiary.

The revised deal sweetens the pot for Digex shareholders and their attorneys, who will receive about $165-million in WorldCom stock in addition to the stock they will receive under the original deal. Another $15-million in cash will be set aside to cover expenses incurred by Digex directors and administrative costs.

Paying the tab will be the rest of Intermedia's shareholders. The agreement calls for cutting the exchange ratio to one WorldCom share for each share of Intermedia from the original 1.1872 WorldCom shares per Intermedia share.

Intermedia chief executive David Ruberg said the deal is not only the best possible for Intermedia and Digex but the best hope that Intermedia will be passed on to a new owner, keeping much of its work force in the Tampa Bay area intact.

"Not only did we do what was right for our stockholders and bondholders, but we did what was right for our employers and customers," Ruberg said in an interview with the St. Petersburg Times Thursday evening. "As a result, the town, the community, will benefit."

Intermedia shareholders will have a chance to decide for themselves. A vote on the revised pact is expected to be held within 50 days.

It is still unclear what will happen to Intermedia's 4,500 employees, including 1,600 in Tampa, or to its leased headquarters buildings. WorldCom plans to retain Digex and, under a deal with regulators, sell the rest of Intermedia to another buyer within six months after the deal closes.

The news of the revised deal was not made official until after the close of market but early reports from CNBC and others spurred a rally in Intermedia shares. The stock rose as much as $2.88 a share, or 20 percent, before closing at $15.31, up $1.19, or 8.4 percent.

WorldCom shares closed at $16.19, down $1.31 or 7.5 percent.

WorldCom, the country's second-largest telecommunications company, was drawn into the original deal last September not by Intermedia's telecommunications core but by its controlling stake in Digex, a rapidly growing Maryland company that manages Web sites for Fortune 2,000 companies.

"I believe the WorldCom-Digex business combination will be a powerful one in the Web hosting marketplace," Ruberg said.

WorldCom initially said it would pay $39 a share for Intermedia's stock and assume $2.9-billion in debt and preferred shares. But a less generous payment formula was triggered after both companies' stocks fell dramatically.

Over the past several months, Intermedia shareholders and federal regulators approved the deal.

But Digex shareholders filed a $2.5-billion class-action suit. They alleged Intermedia and Digex directors breached their fiduciary duties by agreeing to the deal because Digex would have netted far more if it were sold separately.

In December, a Delaware judge ruled Intermedia and WorldCom could proceed with their merger but pointedly warned they might have to pay damages to Digex shareholders. As part of Thursday's agreement, attorneys for Digex shareholders agreed to settle any existing litigation.

Ruberg said he felt Intermedia did not have the time to fight for vindication in the courts. "In the marketplace we're in with the Internet, where speed is important and slowness is an enemy, it was important for us to consummate this deal."

Though the new pact arguably shortchanges Intermedia shareholders, they may not have a better option, analysts said.

"On its own, Intermedia might not even survive, so whatever they can work out with WorldCom will probably be the best alternative," said Tom Burnett of Merger Insight, a New York investment research firm.

The company plans to circulate an opinion from Intermedia's financial adviser, Bear, Stearns & Co., which says the amended exchange ratio is fair to Intermedia shareholders.

If the deal collapses, Intermedia runs the risk of running out of money.

But Ruberg said the company can weather a delay since WorldCom has agreed to provide both Intermedia and Digex with about $250-million per quarter in interim financing until the deal closes.

Since the revised deal does not have to be approved again by regulators, WorldCom and Intermedia are hopeful of closing sometime in the second quarter of the year.

- Contact Jeff Harrington at harrington@sptimes.com or (813) 226-3407.

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