Corvis & Broadwing: Together At LastCorvis & Broadwing: Together At Last
A proposed acquisition sets a stew of questions bubbling. Dr. Huber's shadow looms
February 25, 2003
Trouble getting orders? Buy your own carrier!
That appears to be the logic behind a deal that would see equipment provider Corvis Corp. (Nasdaq: CORV) reaching out for a financial interest in an optical network owned by Broadwing Inc. (NYSE: BRW), which is already a Corvis customer. Today, an entity called C III Communications, owned in part by Corvis and a privately held telecom investment and management company named Cequel III, announced plans to spend $129 million in cash for Broadwing Communications Services Inc. assets (see Broadwing Sells Broadband Biz).
Broadwing Communications consists of the remaining network assets of the large carrier Broadwing, which includes the LEC Cincinnati Bell, Broadwing's original parent company. Cincinnati Bell formed Broadwing after purchasing the network formerly known as IXC Communications for over $3 billion late in 1999.
The bottom line? Broadwing's assets are cheap -- and Corvis wouldn't mind ensuring the longevity of its major customer. "Times change -- companies likeBroadwing are selling their assets for pennies on the dollar to get out from under their crushing debt loads," writes Jeffrey Kagan, an independent telecom analyst, in an email today. "There are going tobe lots of examples of companies... sold for a fraction ofwhat they were worth a year or two ago."
Cequel III, which also owns stakes in several cable TV and broadband service providers, will take over management of the "new Broadwing." All 1,100 Broadwing employees will be offered employment, though it's not clear that all sites will be kept up and running.
The extent of Corvis's stake in the deal has not been revealed. Corvis and Cequel III own a majority of C III, and Broadwing Inc. has a minority interest. But the extent of Corvis's ownership share won't be published until Corvis's quarterly report later in March, a spokesman for Corvis says.
A sale of Broadwing's telecom assets, which include 18,700 route-miles of fiber cable, was anticipated back in January (see Broadwing May Sell Broadband Unit). Once the deal gets approval from a range of regulatory boards and public utilities commissions, Broadwing's parent company will pursue the $350 million financing commitment from Goldman Sachs & Co. that came to light at that time and use that to pay down debt. The Broadwing parent also is seeking to finalize a renegotiation of its credit facility this quarter.
Meanwhile, investors appear to be applauding the Broadwing bailout. At press time, Corvis shares had slipped a penny (1.23%), to trade at $0.64. Broadwing shares had risen by $0.45 (11.14%) and were trading at $4.49.
But the deal carries significant intrigue. One big issue is that Broadwing has been a key Corvis customer, starting with a vendor financing arrangement back in the boom (see Qwest Comes Through for Corvis and Broadwing Sells Corvis Shares). An equipment company having a significant financial interest in its customer presents many potential conflicts. For example, wouldn't Corvis likely try to coax Broadwing into buying more of its gear, regardless of whether it was the right choice? Secondly, Corvis would still be trying to sell its gear to other carriers -- which are Broadwing's competitors.
One analyst, who asked not to be named, says the conflicts are not an issue: "If this Broadwing network had really been a competitive threat to other carriers, someone would have bought it by now." The new deal could help Corvis prove its wares in Broadwing's network to other providers, he says.
"Think of it as the largest and most expensive site demo in history," he quips.One thing may be clear: The deal will help Corvis survive, at least for a while, because Broadwing will obviously remain a customer. As one of the optical switch vendor's only large installations, Corvis has a stake in making sure it stays running.
Other, subtler aspects of today's deal may take awhile to prove out -- and could wind up being significant boons to Corvis. One of these may be what Corvis's founder, David Huber, may bring to bear in what looks to be a complicated, intertwined network of investments. Huber is the controlling shareholder of Corvis, and his fingerprints seem evident throughout.
With approximately 24.8 percent ownership of Corvis common stock, Huber has a vested interest in the success of the deal. Huber also has ownership stakes in many other companies large and small, as well as personal relationships with the wheelers and dealers behind the ventures (see A Survey of the Corvis Food Chain). How these deals tie into the Broadwing connection will be interesting to watch.
Consider, for instance, that Cequel III's founder and president, Jerald Kent, the ex-CEO and cofounder of Charter Communications (Nasdaq: CHTR), is also chairman of the board of Avix, a project financed by Optical Capital Group, a venture company founded by Huber.
According to an article published in the St. Louis Business Journal back in November 2002, Avix, based in Columbia, Md., is involved in linking a series of cable TV networks via fiber optic cable nationwide, using -- you got it -- Corvis switches.
Corvis has nothing to say about Avix, a spokesman says. But the possiblities seem intriguing.
Indeed, the Cequel III connection just might help Corvis win some additional business, and with Avix on the sidelines via Kent -- who knows?
One aspect of today's deal is still in question, though. Ciena Corp. (Nasdaq: CIEN) and Nortel Networks Corp. (NYSE/Toronto: NT) also supply Broadwing's network. As of today, neither vendor had a comment on what the status of their relationship may be with the carrier going forward. What's more, Ciena's ongoing patent litigation against Corvis remains unresolved. It's a question whether the vendor will continue to be comfortable supplying a network owned by a competitor it's taken to law.
In short, today's Broadwing news is a tangled mass of questions, which will take time to unravel.
— Mary Jander, Senior Editor, Light Reading
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