The carrier seeks to expand its profitable Ethernet business outside its 14-state footprint with its $107 million OnFiber buy

May 15, 2006

2 Min Read
Qwest Bets OnFiber

Qwest Communications International Inc. (NYSE: Q) has agreed to buy the privately-held fiber networking company OnFiber Communications Inc. for $107 million. (See Qwest to Acquire OnFiber.)

Austin, Texas-based OnFiber sells managed metro Ethernet and wide-area network solutions in 23 U.S. markets. The acquisition is expected to close during the third quarter of this year and, until that time, Qwest has the option to substitute up to $35 million of Qwest shares for cash.

Qwest offers similar services inside its 14-state footprint, but will use the OnFiber assets to extend those metro Ethernet and other services into other territories. Verizon Communications Inc. (NYSE: VZ) and SBC did this last year -- and to a much grander scale -- by purchasing MCI LLC and AT&T Inc. (NYSE: T), respectively.

"It’s a sound and complementary deal for Qwest,” Qwest spokesman Bob Toevs tells Light Reading. [Ed. note: Well, what else would he say?] “Ethernet has been a high-growth positive for us in-region, and this increases our participation nationally.”

“It expands our penetration around the country while reducing last mile costs,” Toevs adds.

OnFiber reported $50 million in revenue during 2005, and has projected revenues of $60 million in 2006. Its customers include Microsoft, Wal-Mart, and Cisco. (See OnFiber Revenues Grow 24%.) Qwest believes the OnFiber business will be profitable by the beginning of next year.

OnFiber has raised around $151 million in venture capital funding to date. Its backers include Kleiner Perkins Caufield & Byers , Bear Stearns Merchant Banking, Bechteland TeleSoft Partners . In October, it secured $25 million in debt financing from Comerica Bank. (See OnFiber Gets $25M Credit .)

By selling out, OnFiber is reversing a years-long trend when it was the hunter and not the hunted. In 2002, it acquired the assets of Sphera Optical Networks and Telseon. In 2004, it nabbed Massachusetts-based C2C Fiber. (See OnFiber Acquires C2C Fiber, OnFiber Takes Over Telseon, and OnFiber Scoops Up Sphera for $2.3M.)

Heavy Reading analyst Stan Hubbard says the deal is yet another indicator that the value of fiber networks is changing. “Really what it does is continue the recent string of acquisitions by large operators of companies like Wiltel and Telcove,” Hubbard says. Level 3 Communications Inc. (NYSE: LVLT)bought WilTel Communications Group Inc. last year and TelCove Inc. in May. (See WilTel Sale Completed and Level 3 Takes TelCove.) “Many of those fiber assets that were undervalued since the downturn in 2000 are increasingly being bought up,” Hubbard says.

While OnFiber sells wholesale services to operators, it has over the past several years emphasized its enterprise business, Hubbard says. With its “AdaptiveBuild” service, OnFiber offers an end-to-end build of the customer’s network including design, construction and management. (See OnFiber Intros AdaptiveLink.)

— Mark Sullivan, Reporter, Light Reading

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