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Interoute Acquires Ebone

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News Analysis
Light Reading

If you thought the saga surrounding the Ebone portion of the KPNQwest NV (Nasdaq/Amsterdam: KQIP) network was over when it was shut down two weeks ago, you were wrong. Today, U.K.-based service provider Interoute Telecommunications announced that it has purchased the principal assets of Ebone (see Interoute Buys Ebone).

In a press release today, privately held Interoute announced that it has signed a deal with KPNQwest’s Dublin-based receivers, McStay Luby, giving it full ownership and control of high-capacity metropolitan area networks (MANs) in eight European cities, including Paris, Frankfurt, Madrid, Zurich, London, Vienna, Milan, and Amsterdam. The company has also acquired backbone infrastructure connecting Munich and Vienna, Turin and Milan, and Frankfurt and Strasbourg. According to an Interoute spokesperson, the company already has a presence in all of the cities, and will use the acquired assets to expand its presence in those cities.

Interoute, which is majority-owned by the Sandoz Family Foundation and which claims to be debt-free, would not disclose the financial terms of the deal.

"We would not be purchasing the assets if it was not a good deal,” is all Les Hankinson, the senior vice president of sales and marketing for the Americas at Interoute, would reveal.

Rumor has it, however, that the company paid only €15 million (today the Euro was trading roughly on par with the US Dollar) for the assets, a fraction of the €645 million KPNQwest paid when it completed its acquisition of Ebone in March. It is also far less than the €25 million and possibly €100 million in debt payments that InTechnology PLC is rumored to have offered for the entire Ebone network. According to sources close to Ebone, that deal fell through two weeks ago because KPNQwest's creditors didn’t think it was enough.

The Ebone network and its assets have been up for sale since Holland-based KPNQwest, which acquired the company in March, filed for bankruptcy at the end of May (see KPNQwest for a Buyer). Before the bankruptcy, Ebone carried approximately 25 percent of all European Internet traffic, and KPNQwest carried close to half.

"Just the Cisco Systems Inc. [Nasdaq: CSCO] equipment is worth €25 million,” says Graham Kinsey, a former Ebone systems operator. “And then there’s the Ciena Corp. [Nasdaq: CIEN] and Alcatel SA [NYSE: ALA; Paris: CGEP:PA] equipment as well… So [Interoute] got a pretty good deal.”

In addition, Kinsey points out, since Interoute is not buying the entire company, it probably doesn’t have an obligation to take on any of the company’s debt. “As far as I’m concerned, [the creditors] were foolish not to take the [InTechnology] deal,” he says.

According to Craig Johnson, an independent analyst based in Portland, Ore., however, it is hard to determine whether or not previous offers would have been better for the creditors. “It is unclear at this time whether the deal was real or made any sense,” he says. “And the underlying structure of the deal may not have been favorable.”

“The timing was more advantageous to Interoute,” says Hankinson, commenting on why the creditors would go for this offer.

One of the reasons the timing was better for Interoute was that the Ebone network was shut down on July 2, after creditors failed to sell it off (see KPNQwest Breaks Its Ebone). Without a functioning network or any paying customers, the value of the company dropped dramatically, and Interoute was able to pick it up for pennies on the dollar. And while a company wanting to run the entire network as it was would have had to spend a large amount of cash to get it up and running again, Interoute will probably simply groom the fiber strands it needs into its existing network, using its own equipment.

In today’s statement, Interoute’s executive chairman James Kinsella says that the asset purchase will allow the company to continue to support customers still using the Ebone network infrastructure. Observers, however, say they doubt there is a single customer still using the network.

“I am not aware of any customers still using the network,” Kinsey says. “But [with an expanded network] Interoute will have more power to attract more customers.”

Interoute was leasing fibers from Ebone before the network shut down. It had also already purchased a small amount of fiber from the company at a far higher price than that it has paid for a majority of the assets now, according to sources close to the company.

As for the rest of the KPNQwest network, Swedish company Telia AB, which has already bought some of the bankrupt telecom’s assets (see Telia Purchases KPNQwest Assets), seems to be the most likely candidate to buy the remainder. Co-parent company KPN Telecom’s bid for the network was reportedly rejected last week. KPN pulled its funding of KPNQwest on Friday (see KPN Drops KPNQwest).

— Eugénie Larson, Reporter, Light Reading

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