AT&T Buy Spotlights HSA's Yen for Cheap DSL Assets

Cable World, April 2, 2001 by Mavis Scanlon

Prior to AT&T Consumer's agreement to buy bankrupt Northpoint Communication's DSL assets, the opportunity to acquire such assets at much less than market value had escaped many buyers. That may now change.

AT&T's late March announcement highlights the strategy of exploiting DSL distress sales -- an approach that tiny High Speed Access is employing as it seeks to gain a foothold in the commercial DSL market.

"The AT&T purchase highlights to other carriers the value of the opportunity here," says Bob Allison, SVP at brokerage Daniels & Co.

That may mean Littleton, Colo.-based HSA will face more intense competition in its quest to buy DSL assets at cut-rate prices, but Allison points out that since HSA has been looking at this strategy longer than anyone else, the company is ahead of the game.

AT&T will pay $135 million for "substantially all" of Northpoint's assets -- assets Northpoint carried on its balance sheet at more than $500 million as of Sept. 30.

AT&T did not purchase Northpoint's customer contracts; Northpoint said March 28 that it would shut down its DSL network.

HSA, which primarily provides Internet access over cable modems, reported revenue of $14.2 million last year, and analysts expect it to generate $30 million in revenue this year. It hopes to generate about 50% of its 2002 revenue from providing commercial DSL services.

Plenty of assets

To that end, HSA wants to buy DSL networks that have been built -- at substantial cost -- by others.

And there are plenty of assets to bid on, judging by the number of DSL companies that are going bust.

Jato Communications, HarvardNet and Vectris are other companies that may sell DSL assets at fire-sale prices as they shutter toubled operations.

Dan O'Brien, president/ CEO of HSA, says he hopes to have a deal completed within the next month.

If it can pull off its plans, HSA could emerge with regional DSL networks geared to the commercial market for very little cost.

"It not only saves them money but ... more importantly time" in connecting to the local phone companies and setting up their network, says Lara Warner, a cable analyst at Lehman Brothers.

If HSA is successful, it will be able to provide broadband connectivity on a "tech-agnostic basis," she adds, since it already has in a cable-modem infrastructure in place.

Lots of risks

But even O'Brien concedes there are risks.

One complicating factor is that many of the assets are now virtually controlled by networking equipment companies such as Cisco Systems and Lucent Technologies.

Many DSL providers entered credit agreements that are now in default with these vendors. In order to get the bad debt off their books, the equipment vendors are eager to sell the assets or take stock in another entity, Allison says.

HSA's own stock has been floundering in penny stock range for months, diminishing its value as acquisition currency. O'Brien counters that his firm's stock is undervalued, and all shareholders will benefit by the increase in assets.

Then there is the issue of how bids will be structured -- debt, common or preferred stock, or some combination. Even with $130 million in cash at year's-end, the company will be hard-pressed to compete with cash bids from larger companies.

In those cases, High Speed will scrutinize each market for competition before it makes a bid, O'Brien says.