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Net2Phone Raises $58.5M

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News Analysis
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11/20/2003
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Voice-over-IP service provider Net2Phone Inc. (Nasdaq: NTOP) completed a common stock offering today, raising $58.5 million for the company. It plans to use the proceeds for general corporate purposes and expansion into the hotly contested voice-over-cable business (see Net2Phone Sells Shares).

Net2Phone offered 10.5 million shares to the public and 2.5 million shares to IDT Corp. (NYSE: IDT) and Liberty Media Corp. (NYSE: LMG), Net2Phone's controlling shareholders, at an offering price of $4.50 per share. This represented a 12 percent discount on the stock's Wednesday closing price.

Investors weren’t happy with the news. The stock plunged as much as 11 percent in trading, to $4.43 a share.

Net2Phone is hoping its luck will change with the launch last month of its hosted VOIP cable business, Net2Phone Cable Telephony. Right now the majority of its revenue comes from its global services (NGS) unit, which includes a PC-to-PC and PC-to-phone service, a calling-card business, and VOIP gateway products. The revenue mix is set to change as the cable telephony business takes off, according to a Net2Phone spokesman.

“Our pipeline is full of cable operators that are eager to deploy telephony solutions over their HFC networks,” he says. To date Net2Phone has announced deals with Liberty Cablevision in Puerto Rico and CeBridge Connections in the U.S. (see Puerto Ricans Chatting Away).

The ASP model is an interesting idea that has been tried before but is being revived by cable operators that don't want to get their hands dirty building their own voice networks. Instead, carriers, including Net2Phone, Vonage Holdings Corp., and 8x8 Inc. (Nasdaq: EGHT), are offering packaged voice services that can be sold under any cable operator's brand, over their cable networks (see CommPartners Plays Host to MSOs).

Vonage is expected to reveal a raft of new cable MSO partners any day now. So far it has announced partnerships with Armstrong Cable and Advanced Cable (see Vonage Teams With Cable Co). In the race to win cable MSOs, Net2Phone is tapping the support of its parent IDT, a licensed IXC and CLEC. IDT will provide Net2Phone Cable Telephony with its services at favorable rates. IDT’s network includes switching facilities in 20 U.S. cities and additional points of presence in more than 10 countries. Net2Phone can now collocate its equipment and/or interconnect with IDT’s network at any of these end-points, substantially increasing its footprint.

Net2Phone is offering IDT shares of its Class A common stock, which will vest at the rate of 1.38 million shares per year for five years, subject to certain performance standards to be met by IDT. In exchange, Net2Phone gets favorable pricing, access to LEC and IXC facilities, and exclusivity with IDT to market to cable operators.

J.P. Morgan Chase & Co., Jefferies & Company, and Blaylock & Partners LLP were the investment banks in on the deal. In connection with the offering, Net2Phone granted the underwriters an option for a period of 30 days from the offering to buy up to 1.575 million shares of common stock.

— Jo Maitland, Senior Editor, Boardwatch

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