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Wholesale/transport services

MFN Bids for New Role

Metromedia Fiber Network Inc. (Nasdaq: MFNX) today continued its campaign to buy its way out of being strictly a dark fiber company when it bought SiteSmith Inc., a privately held outsourcing firm that specializes in building intranets for ISPs and big corporations. Terms of the contract indicate MFN will spend roughly $1.36 billion in an all-stock transaction by year's end.

Last September, MFN paid about $1.5 billion in stock for AboveNet Communications Inc., which resells colocation and packet switching facilities to ISPs. The addition of SiteSmith's Intranet outsourcing services fills out its offering, it says. "We can offer an end-to-end solution for a managed optical Internet infrastructure," says Nicholas M. Tanzi, MFN president.

Analysts generally applaud the move. "It's an excellent acquisition," says Frank Governali, analyst at Goldman Sachs & Co. (NYSE: GS). "It plays to [MFN's] strengths."

Analysts also say MFN is wise to buy rather than build. "They're moving up the value chain the smart way," says Tim McElgunn, senior research analyst at Stratecast Partners, a consultancy. "They're not trying to create new value in house. They're staying focused on complimenting their overall business model, going outside and buying what they need."

(Regardless of the kudos, MFN's purchase didn't prevent it from being caught in today's Nasdaq turmoil. By late afternoon, its stock was down more than two points, trading at $19.63.)

It's not surprising that MFN is looking to diversify its revenue streams -- there are definite limitations to being a dark-fiber provider. It's a capital-intensive business, requiring years of heavy spending in network buildouts. Hopefully, that spending eventually pays ongoing, steady returns, as carriers invest in 20-year leases for the fiber provided. But in the meantime, cash flow can be a problem.

MFN, for example, showed losses of $136 million for the six months ended June 30, 2000, thanks to costs of its ongoing buildout of fiber in the U.S. and Europe. (MFN now has about 1,400 miles of fiber domestically, and is building out another 1,450 miles in Germany, with plans for other European and Canadian projects.)

In a conference call early today, analysts questioned how soon the acquisition of SiteSmith would help MFN improve its figures. In response, executives said SiteSmith revenues are expected to reach $100 million for 2001 and triple by 2002. And SiteSmith's business is not capital-intensive, they say. All this should improve MFN's overall liquidity, showing up in better EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) figures by the third quarter of 2001.

Improving its liquidity and offering more wares to existing customers could be a wise move for MFN, considering the fate of some other dark fiber providers -- such as GST Telecommunications, which crashed and burned earlier this year (see GST Files for Bankruptcy).

Analysts this morning did wonder about the degree of difficulty MFN will have incorporating AboveNet and SiteSmith facilities and personnel into the MFN structure. MFN executives downplayed this, saying there there should be no problem getting SiteSmith's 169 customers and 400 employees in the U.S. and Europe on board without a hitch.

"There's no overlap," says Tanzi. MFN customers were asking for services like these, he says, and many SiteSmith customers have already opted to use AboveNet facilities.

-- Mary Jander, senior editor, Light Reading http://www.lightreading.com

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