AT&T Acquires Velocita

Times may be tough, but for companies that know how to take advantage of the misery, there are plenty of opportunities.

AT&T Corp. (NYSE: T), for instance, has managed to get hold of a 14,000-mile fiber-optic network for just $37 million in cash and stock. The telecom giant completed the acquisition of the Velocita Corp. network on Friday, after a bankruptcy judge approved the move on Thursday.

“It’s certainly in line with their strategy of picking up distressed assets,” says Davenport & Co. LLC analyst F. Drake Johnstone. “It wouldn’t surprise me if we see more acquisitions like this.”

AT&T confirmed today that it has purchased the Velocita network for $35 million in stock and $2 million in cash -- only about half the price Velocita said it would accept when it started trying to auction off its assets in September. With AT&T as the only serious bidder in the process, the company has been forced to gradually bring down its price from the $75 million it had been seeking.

Falls Church, Va.-based Velocita, which specialized in network construction for its own business as well as for other carriers, was founded with $1 billion in private funding in 1998 -- with a big chunk of the funding coming from Cisco Systems Inc. (Nasdaq: CSCO). It filed for Chapter 11 bankruptcy protection in May this year, listing a total debt of $827 million and $482.8 million in assets (see Cisco's Learning Experience). The company originally hoped to restructure and reemerge from bankruptcy, but it began looking for buyers after it failed to find a credit line to fund it through the process.

The deal is certainly a bargain for AT&T. Through the acquisition, the carrier has obtained assets that will allow it to expand its network for a fraction of the construction price. A glance at other transactions gives a sense of the value of the deal: AT&T, which was Velocita’s largest customer, hired the network construction company to build 6,400 miles of its own “Next-Generation” fiber optic network for $283 million, according to AT&T spokesperson Dan Lawler. He says Velocita completed about 85 percent of the work before it filed for bankruptcy. AT&T paid the company less than $200 million for the work.

As for Velocita’s network, the company had reportedly almost completed its 14,000-mile OC192 network, and AT&T is expected to add the finishing touches. Lawler says the acquired assets consist mostly of conduits, along with some fiber in the conduits. “Essentially, what we’re buying is assets that complement our existing network. In some cases this extends our reach.” In cases where Velocita built out its network side-by-side with the AT&T network, he says, the acquisition will give AT&T more bandwidth.

“This will help them to expand both in the backbone… and the metro market,” says Davenport's Johnstone.

AT&T has only acquired the assets themselves, according to Lawler, and will not be taking over any of the bankrupt company’s employees or customers. Although the company no longer has a working Website, news reports last week citing people close to Velocita state that it will continue operating for the next few months and that it still employs 10 to 15 people. Velocita once employed 243 people and had 60 customers. The defunct company also will continue to pursue a breach-of–contract lawsuit against Lucent Technologies Inc. (NYSE: LU) that it filed in August, according to the reports.

— Eugénie Larson, Reporter, Light Reading
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