PSINet Transaction Solutions is to get back its old name and develop its online financial services arm and European credit card network business if its sale by the financially strapped PSINet Inc. goes through, the buyer group in the deal says.
PSINet Inc., an Internet service provider in Ashburn, Va., bought what was then Transaction Network Services for $720 million in August 1999. The division operates the leading data transport network used by U.S. credit card processors to carry account and purchase information between merchants and the processors data centers for authorization it handled 6.5 billion of point of sale and automated teller machine transactions last year.
But PSINet has been running out of money, and decided to sell the Reston, Va., division to raise some quick cash.
The would-be buyers are Transaction Network Services founder John McDonnell Jr. in partnership with the investment group GTCR Golder Rauner LLC of Chicago. PSINets announcement of the deal last week, however, said it is subject to a number of conditions and that there can be no assurance it will close.
PSINet had bought Transaction Network Services with the hopes of building a business that would develop quicker and safer transactions over the Internet. But it apparently fell short of cash before it was able to realize these ambitions.
In the fall, we became aware of the fact that PSINet was likely to begin pursuing asset divestitures to raise money because they were losing money lots of money, said Phil Canfield, a partner with GTCR, which already has four privately held transaction processing companies in its portfolio.
PSINet spokesman Eric McErlain said the division is being sold because management had determined that it was a noncore asset.
Mr. McDonnell founded Transaction Network Services in 1990. It developed a telecommunications network that accelerated the processing of payment cards at point of sale terminals. That remains it core business under PSINet, but it also validates and authorize prepaid telephone cards and runs a secure Internet network that can hook up brokerage firms to institutional money managers for buying and selling securities.
Under PSINets ownership, the company didnt perform as well as they had hoped, or as well as Jack and his team felt it should have, Mr. Canfield said.
The original deal for $720 million was half cash and half stock. It turns out their stock wasnt worth anything, Mr. Canfield said.
Riyad Said, a managing director and senior analyst at Friedman Billings Ramsey & Co. who covers PSINet, said he had followed Transaction Network Services before it was sold to PSINet, when it was a stand-alone public company. He said it is still a good blue-chip company and a leader in its segment.
Mr. Said said the sale to PSINet had been perceived as a good move back in 1999, and that the current divestiture deal makes sense.
Mr. McDonnell is obviously able to buy a company that has good growth characteristics and a good customer base, he said. And having run the company, they know the company very well.
In the meantime, PSINet Inc. has hired Dresdner Kleinwort Wasserstein as a financial adviser to help it explore alternatives to restructure the companys obligations to its bondholders and other creditors, PSINets release on the deal said. It is also working with Goldman, Sachs & Co., which it hired in November to pinpoint noncore businesses to sell and to explore a sale or merger of the entire company.
The press release said, Even if PSINet is successful in one or both of these efforts, it is likely that the common stock of the company will have no value, and the indebtedness of the company will be worth significantly less than face value.
That may come as no surprise on Wall Street. To some degree this statement is already anticipated by the market, said John Page, vice president and senior analyst for Moodys Investors Service. These bonds are trading at less than 20 cents on the dollar.
PSINet has yet to post its fourth-quarter results, but it has been sending distress signals. On March 2 it issued a press statement saying that its cash and liquid assets had dwindled to $300 million, from $800 million in September.
Theyve had a very heavy cash burn rate, Mr. Page said. When any company mentions even the possibility of the default on its obligations, it is obviously cause for concern.
The company is said to be $3.6 billion in debt, with about $2.3 billion in property, plant, and equipment assets, but those figures date back to Sept. 30. The sale of PSINet Transaction Solutions may give the parent company some short-term breathing room, said David Takata, an analyst for Gerard Klauer Mattison Inc. of New York. But he likened it to rearranging the deck chairs on the Titanic.
Mr. Takata said the economic slowdown and the Internet shakeout have harmed PSINets balance sheet. The strange thing is, its always been regarded as one of the leaders in the Internet solutions business, he said. But wanting to do too much at one time caught them flat-footed.
