Ailing PSINet Files for Bankruptcy Protection

PSINet Inc., the first company to offer Internet access to consumers, filed for bankruptcy protection Friday in the wake of a failed acquisition strategy designed to help it keep pace with younger, more fleet-footed rivals.

The bankruptcy filing had been expected for months as the Ashburn, Va.-based company struggled under the weight of massive debt incurred to fund 76 acquisitions, expand its telecommunications network and build a series of offices for hosting World Wide Web sites.

PSINet helped build the Internet in the 1980s, when it was evolving from a semiprivate computer network used by government and university researchers into a mass medium accessible to all.

The 12-year-old company is probably best known for signing a $105-million deal in 1999 for the naming rights to the football stadium where the Baltimore Ravens play.

PSINet and 24 of its U.S. operating subsidiaries made the Chapter 11 filing in U.S. Bankruptcy Court in New York, while four Canadian business units filed for bankruptcy protection in the Ontario Superior Court of Justice.

The company said its subsidiaries in Europe, Asia and Latin America and its U.S.-based Metamor consulting business are not involved in the filings.

PSINet said it had assets worth $2.2 billion and liabilities totaling $4.3 billion, including $2.9 billion in bond debt. It lost $4.96 billion on revenue of $995.5 million last year.

“Our existing capital structure did not permit us to respond to the rapid changes in our markets,” said PSINet President and Chief Executive Harry Hobbs.

The company said its $300 million in cash, cash equivalents, short-term investments and marketable securities should be enough to carry it through a “restructuring period.”

PSINet said its customers--including individuals, companies and other Internet service providers--won’t notice any disruptions in service as a result of the filing.

Though PSINet fell victim to the “new economy’s” stunning downturn, analysts said the company shares responsibility for its declining fortunes.

It spent billions of dollars building and buying a massive network to speed voice and data around the world and expanded into related industries such as technology consulting.

But the company did a poor job of knitting the scores of firms it purchased into a coherent company.

Its share price plummeted from a high of $60 in March 2000 to mere pennies. On Friday, its stock lost 2 cents to close at a nickel in over-the-counter trading.

PSINet said it has retained investment banking firm Dresdner Kleinwort Wassterstein Inc. to help it evaluate its strategic alternatives. Those include selling itself to another company; selling bits and pieces to several different buyers; and remaining a stand-alone firm.

Analysts said they doubt the company can survive on its own.

“Their competitive position is severely impaired,” said Dan Renouard, vice president at Robert W. Baird & Co. in Milwaukee. “The probability that they could go it alone is pretty low, even in a restructured environment.”

PSINet has already begun shedding units to raise cash.

In March, it sold its automated teller machine network to a group led by private equity firm GTCR Golder Rauner for about $300 million and sold its computer-consulting subsidiary to Arlington Capital Partners for an undisclosed sum.

The company said Friday that it had signed a letter of intent to sell its Canadian operations to Telus Corp. of Burnaby, Canada’s second-largest telephone company.

PSINet also entered into a definitive stock purchase agreement to sell its Panamanian operations to REE Panama and sold the bulk of its business operations in Puerto Rico. Terms of the deals were not disclosed.

Analysts said few companies are likely to be interested in buying PSINet in its entirety. London-based Cable & Wireless is the only telecom company currently scouting for acquisitions.

A more plausible scenario is for PSINet to sell itself in chunks, analysts said. Its most valuable asset is probably its Web-hosting operation, Renouard said. But it is unclear how much PSINet’s assets are worth.

“Everything has just gotten hammered in value,” he said. “It’s a buyer’s market, and there are very few buyers out there who have the wherewithal and the stomach to buy.”

F. Drake Johnstone, an analyst with Davenport & Co., told Bloomberg News that PSINet’s bondholders “would be lucky to get 20 cents on the dollar, and it could end up being less. It could go as low as 10 cents on the dollar.”

The company’s largest unsecured creditor is listed in court papers as Wilmington Trust Co., which serves as trustee for the company’s six separate bond issues.

Its largest trade creditors include Nortel Networks Inc., which is owed more than $99.7 million; a Cisco Systems Inc. unit, owed more than $81 million; and Broadwing Inc.’s Tampa-based communications services unit, owed $27.4 million.

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Bloomberg News was used in compiling this report.