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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, Bechtel and 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

redface 12/5/2012 | 3:53:54 AM
re: Qwest Bets OnFiber Looks like OnFiber was forced to sell at a loss for its investors. It probably was running out of options before it decided to sell at a loss. Its network has Infinera DTN running probably as soon as DTN became available, because OnFiber was founded by the founders of Infinera. Therefore, maybe Infinera DTN is not good enough to bring sufficient competitive advantage to a service provider.

It seems to be a bad data point for Infinera.

paolo.franzoi 12/5/2012 | 3:53:53 AM
re: Qwest Bets OnFiber
Yeah, I was wondering how LR was extolling the value of fiber assets and they got paid less than the money invested.

seven
minnehot 12/5/2012 | 3:53:52 AM
re: Qwest Bets OnFiber The primary reason for this deal, from OnFiber's point of view, is the consolidation of its largest customers. Although OnFiber was moving into the enterprise space the vast bulk of its revenues are wholesale.

The collapse of MCI into Verizon and AT&T into at&t etc, among the other combinations and eliminations brought the end to a very good company that got caught in the telecom meltdown, yet survived.

Qwest is getting a great deal. Too bad there are more like this out there.
firstmiler 12/5/2012 | 3:53:50 AM
re: Qwest Bets OnFiber You are looking at this wrong.

While the sum total invested/raised may equal ~$150M, the financial community only looks at the post washed-out rounds for valuing a sale. Given that there really were two OnFibers; the pre wash-out (bubble era) OnFiber where the stupid money was burned in a parking lot bonfire back behind the Silicon Valley HQ (yes, this "Austin" Company was originally in SV) while the Execs guzzled a keg and celebrated the conflagration, and the post washed-out round where adult supervision came in and ran the things as an actual operating entity of ongoing concern.

All that said, even the recent money did not make nearly the returns that such a risky investment would deem a success.

FM
bear 12/5/2012 | 3:53:28 AM
re: Qwest Bets OnFiber Qwest did get a good deal. Too good it seems. Why did OnFiber low-ball itself to this number? It's a good $30M less than most expected.
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