The Canadian Internet industry became a smaller game with bigger players Monday with the announcement of a deal that will create the country's largest Internet service provider.
PSINet Inc., based in Herndon, VA, announced that it will buy Ottawa-based iStar Internet Inc. for $35 million. Istar will merge with PSINet's privately owned Canadian subsidiary, PSINet Limited.
At least one industry analyst is wondering what the deal will mean for iStar's 70,000 consumer subscribers.
"PSINet is primarily a corporate player and iStar has a substantial number of consumer customers. From a consumer point of view, that's worrisome", said Rick Broadhead, co-author of Canadian Internet Handbook. "I can't say I'm particularly confident in PSINet's ability to service consumers in the same way that iStar has been doing."
Broadhead is also concerned what the deal will mean for competition in the Canadian Internet industry.
"Consolidation is occurring all over the continent. It's definitely intensified over the last couple of months", Broadhead said. "The fear right now is that it's going into a monopoly. That's especially true here in Canada."
But PSINet executives say the deal will improve service to iStar customers. PSINet's private worldwide network will allow iStar corporate customers to have intranets between international offices.
PSINet's head of Canadian operations is quick to point out that the deal is not an American takeover. "(PSINet's) Canadian management drove this deal all the way", PSINet Ltd. CEO Nadir Desai told reporters in a Monday morning conference call.
The deal is definitely a good move for iStar. The ISP has been strapped for capital in recent months. In late July, the company raised $9 million when it sold special warrants to Lévesque Beaubien Geoffrion. And in early July, iStar swung a deal with Bell Canada that would allow it to defer its network access payments of up to $20 million.
Bell gave istar access to its backbone network in July, but allowed the ISP to stretch the access bills over a two-year period. In return, iStar gave Bell the option of buying $20 million in iStar shares.
Citing the ISP's recent money woes, Broadhead agrees the deal was a necessity for iStar. "If they hadn't done anything, they would have disappeared from the radar screen."
Because of the previous commitment to Bell, Monday's deal is contingent upon approval from regulatory authorities as well as Bell Canada, but Desai expects the deal to be finalized within 90 days.
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