OnFiber Takes Over Telseon

OnFiber Communications Inc. announced its purchase of Telseon Inc. last night (see OnFiber Acquires Telseon Assets). But the jury's still out on whether the deal was worth it.

For one thing, it's unclear what OnFiber spent for Telseon. The transaction closed July 31 and included a payout by OnFiber of cash, the issuance of OnFiber common stock to Telseon shareholders, as well as assumption of Telseon debt. The carrier won't reveal a purchase price, but it estimates it would have to spend $85 million for the equivalent of Telseon's assets, so the deal probably totaled considerably less. The assets include metro fiber networks in two cities (Miami and Denver), as well as 50 additional points of presence (POPs) nationwide. Telseon had agreements with Williams Communications Group Inc. for some of the POPs (see Telseon, Williams Expand Networks). The deal adds about 90 new customers to OnFiber's sales roster.

It's highly unlikely OnFiber paid anywhere near full value for all this. After all, back in May, it bought Sphera Networks for $2.3 million (see OnFiber Scoops Up Sphera for $2.3M). That deal added four new cities to OnFiber's network, plus roughly 21 new customers.

Of course, Sphera was in bankruptcy court. Telseon wasn't. Indeed, Telseon has kept its financials notoriously close to its vest, requesting that its numbers not be disclosed to public view, even during interactions with state public utilities commissions. Telseon also filed a defamation lawsuit against Gartner/Dataquest earlier this year for allegedly stating that Telseon was in bad financial shape (see Telseon Sues Gartner for Defamation). The suit's outcome is still pending.

Several things, however, are known: Telseon got $20 million in new funding in January 2002 (see Telseon: Profitable in 2003?). Telseon also bid $1.5 million for Sphera's assets back in May. And Telseon's got a reputation for being a proponent of Ethernet for metro services.

The Ethernet angle could help OnFiber add another option to its metro roster. "We didn't have extensive Ethernet. Telseon has a powerful Ethernet offering," says Michael Rees, OnFiber VP of marketing. He says Telseon's also been fairly successful in focusing efforts to sell Ethernet services for interconnecting POPs, data centers, or servers in telco hotels and colocation facilities. And interconnecting POPs, albeit not necessarily by Ethernet alone, has become OnFiber's stock in trade (see OnFiber Rolls With the Changes).

OnFiber now expects Ethernet will go from less than 5 percent of its revenue to about 15 percent. Wavelength services will continue to represent the lion's share, over 50 percent, of OnFiber's sales, with Sonet connections making up the rest.

"We still see [wavelengths] as our growth business," Rees says. It will take the extension of more fiber to the enterprise than there presently is in most metro areas, he says, to make Ethernet a signal offering.

Analysts say that ultimately, OnFiber's acquisition of Telseon is a minor move that solidifies OnFiber's chances of emerging as a survivor in the niche of independent metro optical service providers. What's unclear is how the market for its services will play out.

"OnFiber's very focused and has a good notion of how to run its business, which is rare in this space, and they have cash," says Maribel Dolinov, senior analyst at Forrester Research Inc. "So I think they'll survive. I don't talk about anyone 'leading' in this business, just surviving."

It remains to be seen how well the overall optical metro services niche fares in the coming months, particularly as RBOCs start to increase their focus on the same market.

A handful of other players appear to be struggling, fighting the odds, or going up for sale. Cogent Communications Inc. continues to claw its way along despite difficult conditions and big debt (see Cogent Hedges Fiber Bets and Cogent Conundrum Continues). Yipes Enterprise Services Inc. recently regrouped and got refunded, with a new focus (see Yipes Reborn – Amid Accusations).

OnFiber says the 40 employees still at Telseon will be added to OnFiber's census of 70, at least for the next month. But it's likely that the need to support Telseon's sites will call for most to stay on, Rees says. On the other hand, Telseon's management is taking a powder: CEO John Kane will move on.

The deal also could threaten some vendor arrangements. Right now, for wavelength services, OnFiber and Telseon both use ONI Systems' gear, now owned by Ciena Corp. (Nasdaq: CIEN). But OnFiber uses gear from Cisco Systems Inc. (Nasdaq: CSCO) and Extreme Networks Inc. (Nasdaq: EXTR) to facilitate Ethernet services, while Telseon primarily uses Riverstone Networks Inc. (Nasdaq: RSTN).

All these systems are "go" for now, Rees says. But there's always the chance that a re-evaluation could tip the scales in favor of one or the other Ethernet providers, he indicates. What's more, Nortel Networks Corp. (NYSE/Toronto: NT) has apparently been waiting in the wings for a chance to tout its wares to OnFiber. In the wake of changes, they may find a more receptive audience.

— Mary Jander, Senior Editor, Light Reading
http://www.lightreading.com