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Optical/IP

Savvis Bulks Up

Managed IP services provider Savvis Communications Corp. (Nasdaq: SVVS) will more than double its size following its successful bid for Cable & Wireless plc's (NYSE: CWP) U.S. assets; and it now has the financial backing of two of its major investors to do so.

Following a 37-hour auction process, Savvis emerged as the triumphant bidder for the C&W America assets that are currently in Chapter 11 protection (see Savvis Acquires C&W US Assets). In the process, Savvis trumped other suitors, including Gores Technology Group LLC and others (see C&W Sells US Albatross, XO Continues Spat With Gores, and Firms Fight Over C&W's US Assets).

Savvis, for the sum of $155 million in cash and $12.5 million in liabilities, has aquired the C&W assets, which consist of a major IP network and 15 data centers that had cost C&W $2.5 billion. The IP infrastructure is the former MCI network that WorldCom Inc. sold to C&W for $1.75 billion in 1998, while the hosting business is the former Exodus Communications business that cost C&W $750 million in February 2002.

The acquisition will take Savvis's annual revenues from less than $300 million a year to about $700 million, bring 5,000 new customers on board, and double the workforce to about 2,100. The service provider currently has a strong foothold in providing secure IP VPNs to the financial sector, where it has nearly 5,000 corporate customers, including the New York Stock Exchange and Reuters. The deal will give the company a chance to sell a broader range of services to the customer bases of both businesses.

"Analysts have questioned our size in the past. Now we have heavier boots to stomp with," says Savvis CEO Rob McCormick, who declined to identify his closest rival bidders.

The firm's share price has benefitted from the move, currently trading at $3.46, compared with $2.51 when the deal with C&W was announced last week. Savvis was nearly ejected from Nasdaq last spring for dropping below the $1 mark, having hit as low as $0.38 last March.

To fund the acquisition and integration of the business, Savvis's two largest private equity investors, Welsh Carson Anderson & Stowe and Constellation Ventures, are providing $170 million in new funding. In addition, Savvis is selling five of its new data centers to Du Pont Fabros Interests LLC for $52 million and leasing them back for at least 15 years.

McCormick says the Chapter 11 process meant Savvis could cherry-pick the assets it wanted. "That's the magic of bankruptcy! We didn't have to take all the contracts that C&W had [with suppliers]. It's a good way to get rid of liabilities and has left us with a very clean business. We have been able to retain some contracts, renegotiate others, and drop some."

But he says there are no plans to use the 10-Gbit/s IP network, based on Juniper Networks Inc. (Nasdaq: JNPR) M160 routers, to get into the wholesale business. "We won't become another Level 3 or Qwest," says the CEO.

Owning the network will cut costs, though, as Savvis will be able to "collapse some POPs and backbone circuits." The service provider leases capacity between cities where it houses Lucent Technologies Inc. (NYSE: LU) ATM switches and Nortel Networks Corp. (NYSE/Toronto: NT) Shasta 5000 broadband service nodes.

But what does this leave C&W? The carrier noted at the time of the initial Gores announcement that it would be retaining U.S. network assets. But now, instead of owning one of the country's biggest IP networks with more than 20 POPs, it houses Juniper M160 and 40e routers in just five cities (New York, Washington, Miami, Los Angeles, and San Francisco) and has struck a series of dark fiber and leased capacity deals with the likes of Sprint Corp. (NYSE: FON).

— Ray Le Maistre, International Editor, Boardwatch

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