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Who's Going to Eat FiberNet?

As the fiber access market heats up, rumors abound that FiberNet Telecom Group Inc. (Nasdaq: FTGX) is one company that might be on the block. The CEO denies it, but analysts say the fate of its peers suggests it won't be an independent firm forever.

FiberNet manages short-haul fiber networks between carrier hubs and commercial buildings in the New York and Los Angeles metro areas. It also offers collocation services in those markets.

FiberNet CEO Jon DeLuca takes issue with the suggestion that his company is up for sale. “That’s not the case. We haven’t announced any indication to be for sale, we’re just focusing on the organic growth of our business."

Asked if his company is ruling out the possibility of being acquired, DeLuca says: “No, not at all. We’re definitely open to it if the right transaction came along.”

A failed acquisition last year sheds some light on FiberNet’s strategic plans then and now. The company had a deal on the table to acquire Con Edison Communications Inc. (NYSE: ED), the telecommunications subsidiary of Consolidated Edison, the New York electric utility. The deal would have approximately doubled the size of FiberNet’s fiber network, De Luca says.

In the end, the deal fell through. “There were a couple of points we couldn’t agree upon,” DeLuca says. “We just couldn’t iron our the details.” Instead, Con Edison Communications sold out to RCN Corp.

Merriman Curhan Ford & Co. analyst Colby Synesael says FiberNet's motivation then is the same as it is today: Get bigger to play better in an already competitive market. Synesael says FiberNet didn’t have a strong enough balance sheet last year to marshall a winning bid for Consolidated Edison.

“I wouldn’t be surprised if after that they said, ‘We’re not big enough to reach scale by ourselves, so we’re better off selling,’ ” Synesael says.

Synesael feels any large and publicly held carriers could be potential suitors. FiberNet would probably be valued at two to three times its annual revenues, which were $33.8 million in 2005, he says.

DeLuca sounds cautiously optimistic about the metro fiber business in general. “The market environment for metro services has improved from where it was a year ago, and especially where it was two years ago."

If recent acquisition activity is any indicator, DeLuca is right. "Recent M&A activity, including the announced plans of Qwest to purchase OnFiber and of Level 3 to purchase Looking Glass Networks, highlight the fact that the metro fiber assets are once again growing in strategic importance," says Heavy Reading analyst Stan Hubbard."

Level 3 Communications Inc. (NYSE: LVLT) has a string of metro fiber acquisitions since last October, so its name often comes up as Suitor No. 1. (See Level 3 Still Hungry for Fiber and Level 3 Takes TelCove.) But Synesael doesn’t believe Level 3 will be interested in FiberNet. Level 3, he says, already has metro fiber holdings in New York and Los Angeles, some of which it picked up in its recent TelCove Inc. acquisition. Synesael says Broadwing Communications LLC may also be on the lookout for metro fiber assets.

Heavy Reading's Hubbard believes several factors could make FiberNet an increasingly attractive M&A target. "I think you need to consider their footprint, revenue growth, and profitability picture," he says. "They have fiber networks in attractive markets (New York/New Jersey), they had nearly 14 percent year-over-year revenue growth in Q106, and they narrowed their net loss to $2.3 million in Q1. "If they are able to show more progress toward breakeven and profitability in the second quarter of 2006, we may very well hear more buzz about them."

For the first quarter of 2006, FiberNet reported a loss of $2.3 million, compared with a loss of $3.3 million in the year earlier period. The company took in roughly $7 million in on-network and off-network metro fiber service fees, and roughly $2 million in collocation revenues. It reported debt of $14.2 million.

“We have experienced significant operating losses and net losses," a March 31 SEC filing reads. "We expect to continue to experience such losses as we continue to operate our business.”

On the other hand, as DeLuca points out, the company isn’t exactly waiting by the phone for a suitor to call. The company recently launched a VOIP peering platform called Phonomenum, as well as an infrastructure management services subsidiary called Availius. (See FiberNet Intros Peering Point.)

FiberNet had 68 employees at the end of March, down slightly from 75 it employed a year earlier.

— Mark Sullivan, Reporter, Light Reading

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