Newly created private equity firm Cori Capital Partners LP (CCP) has just signed a letter of intent to close on its first deal, a data transmission play, wherein it would acquire the remaining Latin American operations of PSINet Inc. in Brazil, Argentina, Mexico and Uruguay. PSINet is a global provider of Internet-based communications services for business.
Cori Capital Partners LP is a private equity vehicle sponsored by Violy, Byorum & Partners Holdings LLC (VB&P); CDP Capital International, a subsidiary of Caisse de depot et placement du Quebec, a major investor in Latin America; and Fenway Partners. The investment group began marketing the fund earlier in the year and has retained VB&P as its exclusive financial adviser.
Sources say the data transmission market is booming, and some people predict the market will grow by as much as 50% to 100% over the next five years, reaching the $10 billion mark by 2005.
Rahul Desai, the New York-based managing director and co-head of Cori Capital Partners, declined to disclose the specific amount his firm invested, but said, “PSINet is second to none” in data communications in Latin America. PSINet Brasil has been voted best corporate ISP in Brazil twice, and the company is also especially strong in Argentina.
“Telecom is definitely one of the areas we’re investing in,” he added. “It has very high returns – it’s a high-growth industry.”
He said CCP will invest up to 40% of its portfolio in telecommunications and IT services going forward.
CCP was designed to make investments, both controlling and with shared control, primarily in middle-market Latin American companies in industries undergoing regional and/or global consolidation, especially those with established franchises in industries where strategic buyers are active. The fund has offices in New York, Mexico City and So Paulo.
Desai said the fund has not closed yet. It is seeking capital subscriptions of $300 million, and CDP Capital, as the lead investor, will invest “25%, or up to $70 million” in CCP, he said.
Desai said the goal with CCP’s first portfolio company is to put it “on sound financial footing and maximize the use of the existing infrastructure.”
Among the services PSINet offers are corporate Internet access and private Internet provider (IP) networks, managed Internet security; Web and database hosting services; electronic commerce solutions; and voice, fax, live audio-video, and other applications. Through its wholly owned subsidiaries, the company operates in roughly 900 metropolitan areas in 20 countries on five continents. PSINet expects that its operations in Argentina, Brazil, Mexico and Uruguay will continue to operate without interruption.
Desai admits there is strong competition in each market segment, including the large telecos like Telefonica in Argentina and Embratel in Brazil. And on the Web hosting side, there’s Diveo Broadband Networks and OptiGlobe, he said. But most of those companies are oriented toward voice, whereas PSINet is in data network communications. And in terms of the whole package – top-level connectivity and web hosting with a pan-regional footprint – PSINet is the only [player], he added.
However, he believes the company’s greatest asset is its “human capital.”
“What for me is not reproducible is the human capital. All the management teams are local and of the best quality, and that’s the toughest thing to find in Latin America. The entire management group is Latin. They have technical and marketing expertise. Our people come from the computer world, [our competitors] from the telephone world,” he said.
Another attractive factor for Desai is the fact that PSINet spun off its consumer business as a separate company, leaving the current group with 3,500 corporate accounts, “including a major airline in Brazil and a major consumer electronics retailer,” he said.
Despite PSINet’s strong presence in Latin America, however, the company will have to change its name. The new name has not been decided upon yet, said Desai. The sale and subsequent name change are part of PSINet’s recently announced reorganization plans.
The Ashburn, Va.-based company is also unloading its Canadian operations. The company has signed a letter of intent with TELUS, pursuant to which TELUS has offered to purchase PSINet’s Canadian operations and facilities.
PSINet’s announced intention to sell the remainder of its Latin American operations follows on the heels of its proposed divestiture of its subsidiaries in Panama and Puerto Rico: PSINet has entered into a definitive stock purchase agreement for the sale of its operations in Panama to REE Panama S.A., and has closed on the sale of substantially all of its business operations in Puerto Rico. (PSINet is in discussions with a potential purchaser group for its operations in Chile, its final non-U.S. American subsidiary.)
Terms of the transactions were not disclosed, and all of the above proposed purchases are subject to a number of conditions, including regulatory approval and approval under bankruptcy proceedings.
On June 1, PSINet Inc. and certain of its operating subsidiaries in the U.S. filed for protection under Chapter 11 of the U.S. Bankruptcy Code, and most of the company’s Canadian subsidiaries filed for protection under similar Canadian statutes called the Companies’ Creditors Arrangement Act.
At the time of the filing, PSINet possessed nearly as much in liabilities as it held in assets: $2.2 billion in total assets, $4.3 billion in total liabilities, of which $2.9 billion is bond debt. Dresdner Kleinwort Wasserstein Inc. is serving as investment banker and restructuring adviser in the company’s Chapter 11 filings, while PricewaterhouseCoopers LLP serves as financial adviser in the bankruptcy.
“Our existing capital structure did not permit us to respond to the rapid changes in our markets,” said Harry Hobbs, president and chief executive officer of PSINet, in a statement. Officials at the company did not return phone calls.
As with PSINet’s operations in Latin America, the European and Asian subsidiaries which were not covered in the filings are expected to continue to operate independently, as before the company filed Chapter 11.
Its American assets have been snapped up like hotcakes. Arlington Capital Partners, a Washington, D.C.-based firm, purchased the global solutions division of PSINet in March. At the time, PSINet said it was selling this division in part to ward off filing Chapter 11. PSINet’s stock then plummeted 74% in late March after an announcement that it would not be able to recover its stock value and could put itself up for sale. Soon after, GTCR Golder Rauner LLC acquired the Transaction Solutions subsidiary of PSINet Inc. for $285 million.
Desai does not predict an IPO for his newly acquired PSINet assets, but a strategic exit, either through a regional player like Telefonica or a power company. He estimates the final closing on the deal will take place by the end of July, pending the bankruptcy proceedings.