Mergers & acquisitions

Corvis & Broadwing: Together At Last

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 like Broadwing 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 to be lots of examples of companies... sold for a fraction of what 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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yikes_stripes 12/5/2012 | 12:34:19 AM
re: Corvis & Broadwing: Together At Last Corvis needs the bandwidth to keep up with the postings of it's disgruntled employees.
likebizy 12/5/2012 | 12:34:19 AM
re: Corvis & Broadwing: Together At Last I have no idea as to the outcome of today's news. However, I think Dr. Dave has brought the "ball" into his court. I give him credit for that. Lets just call this the "mother of all field trials".
BenGrahamMan 12/5/2012 | 12:34:17 AM
re: Corvis & Broadwing: Together At Last OG - We would love to hear your comments.


gzkom 12/5/2012 | 12:34:13 AM
re: Corvis & Broadwing: Together At Last The potential confilct of interest - Covis is the new owner of Broadwing Broadband, who may compete with other carriers - is easy to resolve.

Covis can sell or spin off it when it is strong enough to become a real competitor. But right, it is a real display window for the most advanced Corvis gears, and a possible revenue generator
flanker 12/5/2012 | 12:34:12 AM
re: Corvis & Broadwing: Together At Last The potential confilct of interest - Covis is the new owner of Broadwing Broadband, who may compete with other carriers - is easy to resolve.

Are you kidding? What conflict of interest? How can you have a conflict of interst when there is no market to fight over? Corvis has 0.0001% of the global long haul transport market. Broadwing has 0.0001% of the country's backhaul traffic.

The FTC will rubber stamp this in a second, and no one cares if Corvis leans on Broadwing to buy switches operating at 0.00001% of capacity. Jeez, maybe Corvis can convince Broadwing to use their switches as office furniture.

Sparxe 12/5/2012 | 12:34:11 AM
re: Corvis & Broadwing: Together At Last
Hello All,

Been a long time since I posted. Even though I have been reading the posts, I decided to let the story unfold. If you ask me why, the reply is..... Because their was nothing new to say. The market is the market and the events of the day have not been conducive to tech /telecom growth. I'm close enough to the tech business to know that: unless somebody can turn dog-shit into gold, nobodys buying.

Face it, all of you Rush Limbo drones, the whole world has been Bushwhacked. However, my stock positions remain in CORV and I still have 100% percent faith in management.

As a matter of fact, I am estatic about Broadwing and even more so in the all-star group of talent Corvis continues to bring together. Jerry Kent for one, is a guy you want on your team.

Let's review some of the pluses this deal brings to the table
1. Great Price .. the key to making money is not paying to much for your tools
2. Great customer .. Auto Makers, Aircraft makers and Rubber companies are other industries that adopt this method for getting product to market. Ford owns a big piece of Hertz etc.
3. It works .. Bell Telephone made a bundle with Western Electric and visa versa.
4. Put pressure on the Telcos NOW: As an OEM with an outlet CORV / Broadwing can simply create a new cost structure based on a value price. To compete, the holdouts have to lower their price. How can they do it without the same capacity / cost ratio? Its eight boxes to one ..
5. A living lab breeds innovation, LR can call it an expensive demo, but the truth is demos do not generate revenue. Also CORV can deploy the latest and geatest to broad wing and NOT have piss money away jumping hoops for tire kickers only.
6. Put the money to work!: Ive said it for years now, "sitting on a pile of money makes no sense, put it to work and generate more capital".
7. The Governments are going to love this. Secure and better communications are on the wish list of Governments world wide. Broadwing can make claims that literally no one else can make on their own... case closed

But the brightest light on the horizon is this. Does anyone know what the next big thing is????
Everyone in Telcom is so busy pointing their fingers, while they cover their asses that it has lead to a paucity in brea development. Nobody really knows where the next holy grail is going to come from,,, My money says its going to be from C111 .....

At 60 freakin cents, get on the train, just be patient..

For the record: I am in NO way connected with CORV, its companies, any people at CORV (relations or friends) any stock brokerage or company doing business with them. I am an individual investor with a substantial position in CORV. I do not short any stock ...

Best to ALL,
Sparxe Nj
BobbyMax 12/5/2012 | 12:34:06 AM
re: Corvis & Broadwing: Together At Last Neither Broadwing nor Corvis is a strong company, consequently this union is not likely to bring any fruitful result. It does not make sense to merge an equipment manufacturer and a service provider.
CogswellCogs 12/5/2012 | 12:34:04 AM
re: Corvis & Broadwing: Together At Last Sparxe,

I'm with you on this EXCEPT... next time, leave out the politics. That's where you lose some folks who would join in and help argue your side.

cyber_techy 12/5/2012 | 12:34:04 AM
re: Corvis & Broadwing: Together At Last If Corvis is able to sell equipment this way, good for them. May be this is the only way for Corvis to fight Cisco's anti-competition practices.
puddnhead_wilson 12/5/2012 | 12:34:03 AM
re: Corvis & Broadwing: Together At Last Wow, I'm not sure I'd ever seen a comment from BobbyMax before that makes sense :)
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