Mahi Nabs $70M, Photuris Assets

Mahi Networks Inc. today announced that it has landed $70 million in new funding and has acquired the assets of Photuris Networks out of bankruptcy.

As initially divulged by Light Reading, Mahi has been working for weeks on the acquisition of Photuris, the DWDM optical system maker (see Who Will Buy Photuris Remains?). It says the funding, which will be supplied by a syndicate of eight firms including Jerusalem Venture Partners, Meritech Capital Partners, Oak Investment Partners, Rho Ventures, St. Paul Venture Capital, Stanford Engineering Fund, Van Wagoner Capital, and Wasserstein Ventures, was in place before this deal was made.

It's hard to find the bad news in landing $70 million. And because Mahi likely got Photuris for cheap, buying the assets after bankruptcy, analysts say it makes for a nice gamble.

"This is a small acquisition in terms of dollars, but it really is well positioned for Mahi," says Michael Howard principal with Infonetics Research Inc. "They need the bulk of that $70 million to expand the sales team and support."

Mahi CEO Chris Rust describes the Photuris deal as an asset purchase out of bankruptcy, after Mahi negotiated with the creditors and the bankruptcy court in New Jersey. Mahi officials would not comment on the price of the deal. Rust says the Photoris assets –- and the $70 million –- now give Mahi the resources to build a multi-product portfolio and build up a self-sustaining revenue base.

“We’re focused on converting customers that pay us once into customers that pay us many times,” he says. “We think we have a chance to IPO.”

On the product front, Mahi officials are pitching the Photuris box as a natural fit with Mahi’s optical switch, the Mi7, which provides STS-1 grooming, Sonet crossconnect, switching, and Ethernet transport features in one system. The Photuris product is being renamed the Mahi Vx7 and is being positioned to sit alongside the Mi7 in central offices to transport traffic over optical DWDM networks that can be remotely configurable, enabling operators to add and drop wavelengths on the fly. It can run 32 wavelengths per fiber, with each system handling two fibers.

Rust claims that unlike competing products, both the Mi7 and the Vx7 are more flexible and manageable. "This isn't just lipstick on an SDH pig, as some of our competitors are doing," says Rust of the Mi7.

Rust also notes that competitive metro DWDM systems require that the system be taken down to reroute a wavelength. The wavelengths in the Vx7 can be remotely reconfigured on the fly. Indeed, carriers have recently expressed a growing interest in emerging reconfigurable add/drop multiplexing (ROADM) technology, upon which the Photuris system is based (see Vendors Race for Reconfigurability).

Mahi and Photuris have together taken in more than $300 million in total funding, however, so they've got lots of product to sell to make a return on the investment. Mahi had previously announced one small deal with Buckeye TeleSystem Inc., a small regional provider in Ohio (see Buckeye Extends Mahi Deployment); and this morning it announced a deal with Scana Communications, a subsidiary of a South Carolina power company, Scana Corp.

Despite these deals, however, Mahi likely still needs the big deal with a large ILEC or IXC that is generally needed to keep a startup independent these days, says Infonetics' Howard: "If they clear an IXC customer and an MSO customer, then they could be on their way to an RBOC."

Light Reading has reported that Mahi is being tested at MCI Inc. (Nasdaq: WCOEQ, MCWEQ), and a customer announcement may be imminent. But Mahi won't comment on this (see Sources: Mahi Moves Include MCI Win).

Mahi officials said they have converted all of the Photuris trials over to Mahi, and that there was no disruption in the testing process.

Photuris has been the subject of much intrigue since it shut down in March. Its system was believed to be a leading contender in the RFP for metro optical switching gear at SBC Communications Inc. (NYSE: SBC). (See Photuris & SBC: The Inside Story and Photuris Is Finished.) Some sources say Photuris's removal from the shortlist at SBC led to its closure. The Photuris box has also been confirmed to be in trials at Verizon Communications Inc. (NYSE: VZ). Trials with BellSouth Corp. (NYSE: BLS) started last November or December, according to sources.

As for other expected announcements -- such as a potential deal at MCI -- Mahi isn't talking. Company officials said more customer deals are expected shortly.

— R. Scott Raynovich, US Editor, Light Reading