Intermedia takes hit on job cuts

Published Jul. 2, 1998|Updated Sep. 13, 2005

Shares of Intermedia Communications Inc. fell 8 percent Wednesday, a day after the company said it will eliminate 280 jobs and take a charge against second-quarter earnings.

The job cuts are part of a broader effort to reshape the Tampa telecommunications company, which is experiencing what analysts called inevitable growing pains after a two-year acquisition binge. Over the next 15 months, Intermedia plans to combine sales forces, unite telephone networks, pare office space and integrate back-office computer systems.

News of the undertaking, however, spooked some investors who sold shares to protect their profits after a recent increase in the stock price. Shares closed at $38.56\, down $3.37{.

More shareholders could follow suit if Intermedia stumbles in its streamlining effort. That risk has some analysts cautioning investors. Intermedia has "its hands full," said David Heger of A.G. Edwards & Sons Inc. in St. Louis.

Intermedia remains a darling of Wall Street even though it has never turned a profit in its 12-year history. Its appeal: It's seen as an attractive takeover target.

Through acquisitions and internal growth, Intermedia has built an extensive fiber-optic network that can carry both voice and data. The company has access to nearly 100,000 business customers primarily in the eastern United States.

These assets are in demand in a rapidly consolidating industry in which phone and cable companies scramble to control the information pipeline into businesses and people's homes. This trend was underscored last week with AT&T Corp.'s planned purchase of cable giant Tele-Communications Inc.

Speculation has Intermedia on the shopping lists of Bell Atlantic Co. and US West Inc., both Baby Bells looking to expand their reach beyond their traditional service territories. Now, smaller long-distance carriers are apparently eyeing Intermedia as well, according to analysts.

Such companies are not daunted by the fact that Intermedia lost $284-million, or $17.09 a share, in 1997.

Wall Street doesn't measure start-up telecommunication companies like Intermedia by the typical financial indicator of net income. "The wireless companies just started turning profits after being in business for 10 years," said Robert Venable, an analyst with Robert W. Baird & Co. in Milwaukee.

These companies make heavy investments in networks or buy companies that already have them. They fuel this growth by borrowing money. For instance, Intermedia's long-term debt increased to $1.2-billion at the end of 1997 from $353-million the year before.

The building costs and interest expense eat up revenues for many years. Indeed, Heger of A.G. Edwards doesn't expect Intermedia to report a profit to the bottom line for another five years.

Instead, analysts pay attention to Intermedia's ability to generate positive operating cash flow, meaning more money is coming in than going out. It's a common measure in the communications industry. On that score, analysts expect Intermedia to have positive cash flow in the second quarter, which ended Tuesday, and show about $60-million for the year.

For its part, Intermedia doesn't comment on merger speculation. The companys says it is focused on absorbing the recent acquisitions of Shared Technologies Fairchild, LDS Communications Group and National Communications of Florida.

Intermedia will trim 7 percent of its 4,000-person work force. The cutbacks will affect only nine positions in Tampa, where the company has 900 employees, said spokesman John Strickling.

The costs of the downsizing and other restructuring expenses will be wrapped up in a charge that will be recorded in the second quarter. The company declined to disclose the magnitude of the charge. Financial results for the quarter will be released July 29.

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