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Exodus: What's Next?

Light Reading
News Analysis
Light Reading
9/27/2001

Yesterday, Exodus Communications Inc. (Nasdaq: EXDS), the Web hosting provider that feasted on the dotcom boom of the late 1990s, filed for Chapter 11 bankruptcy protection in U.S. Bankruptcy Court for the District of Delaware in Wilmington.

This news comes as little surprise. The company had aggressively built-out its network, racking up about $3.5 billion worth of debt, its stock was trading for pennies, and trading in the stock was halted yesterday as rumors of bankruptcy spread.

Now the big question is what’s next for Exodus? The situation could play out in a couple of different ways. Option one: the company’s creditors, which include HSBC Holdings plc, Legg Mason, Inc. (NYSE: LM), Fidelity Investments, and a slew of others could sell the assets to try and recoup the money they lent to Exodus. Analysts say that is unlikely, however, since these assets, including equipment and real estate, would likely not garner much cash.

Option two: Exodus’s ownership is restructured. In this scenario, the creditors would take on the debt in exchange for equity in the company. HSBC, which holds about $2.8 billion in debt would get the bulk of the equity with others like Legg Mason, which is owed $127.5 million, and Fidelity, which is owed $88.6 million, getting smaller chunks of the company.

Analysts following the company see the second option as the most beneficial since, aside from its debt, the company’s financials are in relatively good shape. Without the $70 to $80 million in interest on its debt, the company would be at a breakeven point, says Alex Arnold of Adams Harkness & Hill.

“I doubt the creditors would push them to shut down,” he says. “They wouldn’t be able to recoup their money. Besides, Exodus has a strong cashflow business and if you look above the debt, they are working at breakeven.”

What’s more, the company also reportedly only uses about 50% of its total capacity in its 44 Web hosting facilities throughout the country. Exodus would have two options then. It could try and fill the remaining capacity with new revenue-generating customers, or it could consolidate its facilities and sell off the unused assets. Consolidation would help the company reduce operating expenses by lowering its overhead and increasing margins on its services, says Arnold.

Creditors, now owners in the company, would then be able to sell the company at a higher premium to recoup their investments. With the debt forgiven, potential acquirers would be more likely to buy the company. If the company isn’t acquired, the new owners could also continue to build the business and reap the benefits of what some analysts believe is a growing Web hosting market.

Who would be interested in Exodus’ assets and/or in acquiring the company outright? Two names that have floated to the top of the list are Cable and Wireless (NYSE: CWP) and Microsoft Corp. (Nasdaq: MSFT). Cable and Wireless, based in the U.K., has a similar Web hosting business in Europe, but doesn’t have any facilities in the United States. Purchasing all or part of Exodus would give Cable and Wireless a U.S. footprint. Cable and Wireless, though, has also hit rough economic times and is rumored to be on the verge of bankruptcy as well, says Arnold. The other top candidate is Microsoft, which uses Exodus to host its services now. Some analysts say that Microsoft might also benefit from gaining assets in the Web hosting business. Then there are Exodus’s competitors. IBM Global Services, Qwest Communications International Corp. (NYSE: Q), and WorldCom Inc. (Nasdaq: WCOM) are just a few of the players that would be interested in either acquiring Exodus or some of its assets.

So what does all this mean for the average investor who owns Exodus stock?

Well, if the company is liquidated now, shareholders essentially get nothing because the creditors will be standing ahead of them in line, waiting for their piece of the pie. And if the company’s ownership is restructured, they will again find themselves bringing up the rear. The only possible way for shareholders to get any money back is if the ownership is changed and the company becomes wildly successful.

Trading of Exodus stock was halted Tuesday when shares fell to $0.17 in anticipation of an announcement. Trading was expected to continue Thursday, but by midday trading had not started.

— Marguerite Reardon, Senior Editor, Light Reading
http://www.lightreading.com

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