Verizon, NorthPoint in heated dispute over DSL merger deal

Verizon Communications Inc. yesterday terminated a deal under which it planned to merge its digital subscriber line (DSL) business into struggling NorthPoint Communications Group Inc. and invest $800 million in that company -- a move that prompted NorthPoint's CEO to threaten legal action against Verizon.

Verizon, which announced the agreement to set up a national broadband services provider with San Francisco-based NorthPoint in August (see story), said it was dropping the planned merger because of a "deterioration in NorthPoint's business, operations and financial condition" since the deal was signed.

The action by New York-based Verizon came just a week after NorthPoint restated its third-quarter financial results, reducing its revenue for the period from $30 million to $24 million and increasing its operating loss from $79.2 million to $90.9 million. That announcement triggered a clause allowing Verizon to back out of the deal in the event of "adverse material changes" at NorthPoint, said Verizon spokesman Peter Thonis.

As a result of the termination, Verizon said it also now has no obligation to provide NorthPoint with interim financing or to help it arrange for additional funding. NorthPoint officials had expected to receive $200 million from Verizon prior to the closing of the merger agreement, which was scheduled to be completed by the middle of next year.

But during a teleconference today, Liz Fetter, NorthPoint's president and CEO, raised the possibility of taking legal steps to try to compel Verizon to go through with the deal. "We do not believe that Verizon is entitled to terminate either the merger agreement nor its agreement to provide interim financing," she said.

Fetter added that she wouldn't comment specifically on the matter, "as these issues will be subject to legal actions in the very near future." In a statement issued yesterday, however, Fetter said she was "stunned" by Verizon's decision and was "exploring all our options, including funding options and legal remedies."

But Thonis insisted that Verizon was within its rights to scuttle the deal. "We strongly dispute [Fetter's claims]," he said. "We have terminated our merger agreement. That's our position, and we're sticking with it."

The August agreement had looked "very positive" for both companies, said Courtney Quinn, an analyst at The Yankee Group in Boston. "It gave NorthPoint the cash it needed, and it provided Verizon with a strong base of [DSL] customers," Quinn said. But Verizon now appears to be shifting toward a more business-oriented broadband strategy, she added.

In a separate announcement today, Verizon said its own DSL network will be expanded to meet the needs of large business users that operate in multiple regions. The company also said it will use a recent acquisition of Lake Forest, Ill.-based OnePoint Communications Corp. and a business relationship with White Plains, N.Y.-based Metromedia Fiber Network Inc. to provide some of the capabilities that would have been gained through the deal with NorthPoint.

In addition, Verizon revised its earnings outlook for the next two years, raising its forecasted profits to reflect the elimination of losses that the company was expecting from its investment in the venture with NorthPoint.

Meanwhile, Fetter said NorthPoint has more than $165 million on hand and is "currently not in violation of any financial covenants." She also said Verizon's "alleged termination does not put us in default under our bank [lending] facility."

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