The Reborn J Net May Have a Growth Charm

How the slot-machine-operator-turned-tech-holding-company's 56% stake in troubled InterWorld could lead to a big payoff

By Gene Marcial

If you haven't entirely burned out on Internet stocks and want to take another fling at the group, you might want to consider Big Board-listed J Net Enterprises (J ), formerly named Jackpot Enterprises. Why? J Net may have just hit the jackpot in its latest deal with cash-strapped InterWorld (INTW ), a global provider of software solutions for business-to-business (B2B) and business-to-consumer (B2C) e-commerce. George Soros was an early investor in InterWorld which, like many other Internet companies, has flamed out to almost zero.

J Net, currently trading at $6 a share, transformed itself at the end of 1999 from a gaming company to a technology holding company and incubator of Internet companies. After CEO Donald Kornstein left in mid-2000, Jackpot Chairman Alan Tessler took over the helm as CEO and turned Jackpot into a new company. One investment pro who has increased his company's stake in J Net as a result is mutual-fund maven Mario Gabelli. His investment company now owns 13% of J Net, up from 8.5%. Gabelli was originally a stakeholder in Jackpot.

InterWorld was a high-flier during the glory days of Net stocks, soaring up to 85 a share in mid-March, 2000. Then the roof caved in. With a massive correction hitting the dot-coms, the stock had tumbled to 50 by the end of March, and what followed was a scary, speedy downhill ride for InterWorld investors. It dropped by mid-April to 20, and today, it's trading at a mere 68 cents a share.


  Burdened with losses and mounting debt, InterWorld in January turned to its main financial backer, J Net, which already had acquired some $20 million worth of InterWorld shares, or 20% of the stock, some six months ago.

But InterWorld owed J Net some $30 million. To pay off that liability, InterWorld agreed to sell more shares to J Net, giving J Net up to 56% ownership. That's not all. J Net has the right to purchase additional shares at 65 cents a share. All told, InterWorld would receive $40 million from the complex financing deal. But control of the company moved to J Net. InterWorld's board has elected J Net CEO Tessler as chairman of InterWorld. Previous Chairnman Michael Donahue was named vice-chairman but retained his title of Interworld CEO.

With its huge and increasing stake in Interworld, J Net's holding in that company is already worth $6 a share in J Net stock, thus almost doubling the value of J Net shares. And if InterWorld with its new cash hoard starts to do better, as some big investors predict, the value of J Net's holdings will increase even more. So should J Net's own stock.


  Ken Pavia, president of Bolero Investments, which had been a stakeholder in Jackpot and now is a 5% holder in J Net, calculates that if the InterWorld's stock were to eventually rise to, say, $3 a share, J Net's interest in InterWorld would be worth 30 a share in J Net stock. "I believe this could happen because of the brightening prospects of InterWorld under the guidance and leaderhip of J Net and J Net CEO Tessler," says Pavia.

At this level, "shares of J Net are definitely a bargain, considering the prospective value of InterWorld," says Leo Rishty, editor of the market newsletter, Unique Situations, in Weston, Fla. Revenues at InterWorld in the past nine months rose to nearly $50 million, vs. $43 million for all of 2000, Rishty says. Joseph Biernat, director of research at Boston securities firm Kimball & Cross, has a 12-month price target of 20 to 22 for J Net's stock.

In its previous life, Jackpot and its stock had their ups and downs. But in the summer of 2000, it flew as high as 21 a share, up from 10. One reason was Players International had offered to buy Jackpot, which was then one of the largest slot-machine operators in Nevada, with some 3,700 machines at 375 locations. But when Players backed out of its commitment, Jackpot's stock collapsed, dropping back down to around 10. Jackpot received a breakup fee of $13.5 million from Players.

Rishty and Pavia now predict that InterWorld will turn profitable sometime next year. If that happens, the big beneficiary, they're sure, will be J Net -- which could own as much as 68% of InterWorld if it were to exercise all of its options to buy shares.

Marcial is BusinessWeek's Inside Wall Street columnist

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