Is Savvis Saved?
Savvis, which has built a service provider business that caters to financial institutions, raised about $425 million in its initial public offering back in 2000, but like the rest of the service provider industry, the company has recently struggled to stay afloat. A year ago, the company came close to bankruptcy when its main customer and majority shareholder Bridge Information Systems Inc. went bankrupt.
“The entire market was getting crushed just as Bridge was having trouble,” says Jack Finlayson, president and COO of the company. “Everything was hitting us at once. It was the Perfect Storm of the telecom industry.”
Now fears of bankruptcy have been laid to rest thanks to the new financing. But industry observers say Savvis’s miraculous save does not signal a telecom turnaround.
"I’d say that you’ll see more service providers emerging from bankruptcy than you will companies maintaining their current capital structure,” says Tavis McCourt, senior telecom analyst with Morgan Keegan & Company Inc.
This new funding may have saved the company, but it comes at a hefty price to Savvis's current investors. In exchange for $95 million cash and a debt forgiveness of $20 million, private investment firm Welsh, Carson, Anderson & Stowe will get 56 percent of the company. The other major investor, Reuters PLC will get an 18 percent stake in the company for its $37.5 million debt forgiveness. The remaining $5.5 million is interest owed to Reuters and Welsh that will also be converted to equity. This new equity arrangement will significantly dilute current investors.
Still, shareholders will make out better under this arrangement than if the company went into bankruptcy, says McCourt. The fact that the investors are willing to keep the company out of bankruptcy is a good sign that they see some value in its business. McLeodUSA (Nasdaq: MCLD), which has filed for bankruptcy, and XO Communications Inc. (Nasdaq: OTC: XOXO), which is about to file for bankruptcy, also took money from private investors (see McLeodUSA on the Brink ). But both of these providers have debt in the billions of dollars.
“Savvis is in better shape than McLeod or XO,” says McCourt. “In general its debt isn’t as high, and it has a good position in the financial services community. It benefited from going after a niche, instead of trying to be all things to all people.”
The new financing will fully fund Savvis's plan to become profitable by next year, and the company will no longer be in default on any loans, says Finlayson. The deal will also reduce Savvis’s debt by $214 million, to $93 million. Compare this to the $5 billion debt still on XO's books. Savvis will use much of the money to pay off loans from equipment providers Nortel Networks Corp. (NYSE/Toronto: NT) and Lucent Technologies Inc. (NYSE: LU), which helped the company build out its network.
Savvis’s stock closed up $0.10 (10.75%) to $1.03.
— Marguerite Reardon, Senior Editor, Light Reading