H&R Block Inc. said on Monday it reached a $1.2 billion agreement to sell its majority-owned CompuServe Corp. unit in a deal that reshapes the universe of online services, an industry that CompuServe pioneered.
Under terms of the pact, America Online Inc. and WorldCom Inc. will carve up CompuServe between them, with AOL taking the consumer online business it vanquished on the path to industry leadership and fast-growing telecommunications company WorldCom scooping up CompuServes commercial side.
Analysts saw positives for all the companies but reserved particular praise for the cooperative effort between America Online and WorldCom, which joined forces rather than fight over CompuServes remains.
This is a very, very good deal and I think this was a case where two bidders figured out a way to split up the assets in order not to have a bidding war take place, said Frank Dzubeck, president of Communications Network Architects in Washington.
The deal broadens Jackson, Miss.-based WorldComs reach in the Internet, where its Uunet unit is a major presence, and fits with the companys focus on commercial Internet services.
The strategy looks like just the right thing for this company (WorldCom), said analyst Scott Wright at Argus Research. It focuses them on business customers on the Internet, which is where they want to be focused.
Technically, WorldCom will purchase all of CompuServe for all stock, offering 0.40625 share for each CompuServe share and transferring CompuServes subscriber base to America Online in a separate set of transactions.
Along with CompuServes subscriber base, WorldCom will pay $175 million in cash to America Online in return for AOLs ANS Communications network services unit. The companies also reached agreement to sign a five-year contract making WorldCom AOLs largest network service provider.
AOL Chairman and Chief Executive Steve Case said the contract should help AOL deal with its well-known capacity overloads and the resulting intermittent user access problems by turning the systems upkeep over to WorldComs expertise.
Im not ready to declare victory yet, Case said, but the alliance with WorldCom will really help.
Case said AOL expected to have about 650,000 modems in place by year-end, which is more than triple what we had last January.
The deal enhances AOLs dominance in the United States as an online service provider, combining Columbus, Ohio-based CompuServes 2.6 million subscribers with AOLs customer base, which recently passed the 9 million mark.
For now, AOL plans to operate CompuServe as a separate service in the United States and elsewhere, hoping to limit attrition among overlapping customers or the exodus of those who had actively shunned AOL.
The deal also helps AOL overseas. In a related set of investments, German publisher and media company Bertlesmann AG agreed to pay AOL $75 million and the two companies will each invest $25 million and add CompuServe to their existing online service in Europe. The addition is important because growth has come slowly for AOL in Europe, where its membership of about 700,000 lagged CompuServes 850,000 subscribers. AOLs stock surged after the news, rising $6.125 to $76.0625 in afternoon trading on the New York Stock Exchange.
Based on WorldComs closing stock price of $31.50 Friday, the sale values CompuServe at $1.2 billion, or $12.80 a share, H&R Block said. It said it will own a 3 percent stake in WorldCom after the sale.
The price is a far cry from the $30 per share CompuServe commanded when H&R Block sold 20 percent of the company in an initial public offering last year.
The precipitous stock price decline is the subject of several shareholder lawsuits, including one by the board of Floridas pension fund. Some analysts said the deal is likely to be scrutinized by the U.S. Justice Department over possible antitrust concerns because of AOLs dominant position among online providers.
But AOLs Case minimized those concerns, saying, We are confident that this deal will pass muster in terms of the regulators in both the United States and around the world.
CompuServe traded at $13.3125, down 18.75 cents, while WorldCom rose $2.25 to $33.75, both on Nasdaq. H&R Block shares fell 18.75 cents to $39.75.
H&R Block said that after the deal, it will proceed with plans to buy back up to 15 million of its shares.
The H&R Block-WorldCom deal was unanimously approved by the boards of both companies. It will be accounted for as a sale of CompuServes assets for tax purposes, H&R Block said.
