November 29, 2000: 6:30 p.m. ET

Verizon cites NorthPoint's financial woes;
NorthPoint explores legal options

NEW YORK (CNNfn) - In a move which could seal the fate of NorthPoint Communications, Verizon Communications Inc. confirmed Wednesday that it will not be purchasing a 55 percent stake in the independent DSL firm.

The decision scuttles the planned merger of each firms' DSL businesses, but NorthPoint said such actions are invalid and it is exploring legal options.

According to Deutsche Banc Alex. Brown analyst Michael Bowen, NorthPoint will have trouble surviving without the Verizon funding. The No. 1 local telephone company in the United States pledged $800 million in compensatory funding to NorthPoint: $450 million to be used for operations, and the rest to be distributed in payments to each NorthPoint shareholder of $2.50 per share. The shareholders were to be allowed to keep their shares.

Verizon said it terminated the deal because of NorthPoint's deteriorating financial, business and operating conditions. Verizon also said it will not arrange for NorthPoint to receive additional financing.

"Verizon has significantly improved on its own in terms of DSL and it had a fantastic third quarter," said Patrick Comack, who covers Verizon for Guzman and Co. "They wanted NorthPoint for their expertise in DSL and they don't need that expertise anymore."

"Verizon has lost confidence in NorthPoint's ability to do the job," Comack said.

But NorthPoint fired back soon afterwards, claiming Verizon is not entitled to break the agreements.

"I am stunned to get the news after months of conversations with Verizon on the strong business opportunities available to the combined entities," said Liz Fetter, NorthPoint Communications president and CEO, in a statement. "Verizon was not entitled to terminate these agreements, and we are exploring all our options, including funding options and legal remedies."

Verizon spokesman Peter Thonis said as far as his company is concerned there is nothing to stop Verizon terminating the merger.

"We disagree with their position," Thonis said.

He also confirmed there is no breakup fee for terminating the deal.

Changing circumstances

On Nov. 20, NorthPoint revised its third-quarter 2000 financial results, where it indicated a decline in revenue, an eroding customer base and material increases in net loss.

"When we announced the merger agreement on Aug. 8, this was not the case," Thonis said.

Bowen, an analyst who follows NorthPoint, said the funding is critical for the company. "If they lose Verizon they don't have much of a future," Bowen said.

After the termination of the merger was announced, Standard and Poor's revised its CreditWatch implications for the company to negative from positive.

Bowen said he doubted NorthPoint had much of a legal standing, since there is usually an "out clause" when circumstances materially change, but expected the company to try and go back to the table and negotiate with Verizon.

But the Verizon spokesman downplayed that possibility."The company did not think it was feasible to restructure the deal," Thonis said.

Comack said along with wireless, DSL is a key area for Verizon, and it is too important for management and investors to let it be run by a deteriorating company.

"I don't think Verizon wants a problem child," he said.

New York-based Verizon (VZ: Research, Estimates) was formed by the merger of Bell Atlantic and GTE. The NorthPoint (NPNT: Research, Estimates) purchase was expected to be completed next year. So far, Verizon has paid about $150 million and has received stock in exchange. The phone company will not be asking for its money back, Thonis said. Verizon gained 81 cents to $55.81 Wednesday.