COVAD CEO HOFFMAN INSISTS COMPANY IS NOT FOR SALE

In the wake of Telephony report, Covad denies buyout negotiations

Covad Communications CEO Charles Hoffman denied last week that his company is in discussions to be acquired, as Telephony reported in its April 8 issue.

“We didn't go through what we went through last year to sell the company at $2 a share,” Hoffman said. “That would be ridiculous.”

Covad refused to comment about a potential sale of its business until after Telephony's report was published. One of the sources of the information maintained last week that negotiations existed between Covad and Sprint. Too many people had been whispering about a possible acquisition for there not to have been substantial talks, said David Gross, senior analyst at Communications Industry Researchers.

Hoffman dismissed the claims, saying Covad was in talks regarding a potential business relationship with Sprint. Other industry observers say current economics lessen the likelihood of a Covad acquisition.

“There aren't really any companies buying at this point,” said Vik Grover, managing director of equity research at Kaufman Bros. “People are putting out their own fires, and over the long term, companies don't really need to buy them when they could work with them instead.”

To deter a hostile takeover attempt, Covad put a poison pill into effect, Hoffman said. That plan — triggered by a single entity purchasing 15% or more of the carrier without board approval — would allow other shareholders to buy shares at a lower cost and thus strongly dilute the amount being acquired. Another measure would require Covad to pay SBC Communications the $50 million debt it owes to the Bell company in the event of a takeover attempt, according to Covad investor Ray Khorram.

Such anti-takeover moves may not be necessary because of a lack of suitors, said Peter DeCaprio, financial analyst at Thomas Weisel Partners. Should the company's share hit the $7 range, they may attract some interest, he said.

Most employees' options have a strike price of $5, giving top executives a strong incentive to surpass that point.

“We would obviously have a fiduciary responsibility to our shareholders that if someone made a great offer, we'd have to consider that,” Hoffman said. Still, he conceded that with a stock price as low as Covad's, a hostile bid is a possibility. “But there is no indication any of that is happening. There is no one buying up big blocks of shares.”

CIR's Gross previously estimated that Covad would fetch only $15 million to $25 million beyond the company's $283.8 million in cash and short-term investments. Gross stood by his estimate last week, saying Covad is overvalued at $2 a share. Even though the company has successfully cut costs, it is still gross margin negative, he said.

“I don't believe the claims they are making about being fully funded, which means they will have to close down additional COs to prevent another cash crunch,” Gross said.

Covad also is looking at increasing its footprint. This week, Hoffman will present the company's board with a plan that will include a substantial expansion.

“It won't be tiny,” Hoffman said.