Corvis Notes Broadwing Wiggle Room

Corvis says it may reduce its share in the acquisition, but deal continues to puzzle

March 26, 2003

4 Min Read
Corvis Notes Broadwing Wiggle Room

Corvis Corp. (Nasdaq: CORV) may attempt to reduce its stake in the entity formed to take over Broadwing Inc. (NYSE: BRW). But questions remain about why Corvis wants to buy one of its customers.

In a statement and Securities and Exchange Commission (SEC) filing issued yesterday (see Corvis Files Broadwing Deal Details), Corvis revealed its 96 percent share in C III Communications LLC, the entity that hopes to buy Broadwing's assets within the next six months (see Corvis & Broadwing: Together At Last). Broadwing's parent company owns 3 percent of C III; and another entity, Cequel III, a St. Louis-based telecom investment and management firm, owns the remaining 1 percent.

In today's filing, Corvis reiterated plans to invest $128 million in C III, followed by $50 million by the end of this year to fund operating expenses. C III plans to buy Broadwing's assets for $129.3 million within the next six months, pending government approvals.

But Corvis also says it "is evaluating the possibility of raising a portion of these funds from other investors, which could reduce [Corvis's] committed investment amount and percentage of ownership."

Why would Corvis want to reduce its stake? One reason may be a wish to distance itself from the furor it's caused over pledging to help buy one of its largest customers. For the fiscal year ended December 28, 2002, Corvis reported that Broadwing accounted for $8.7 million of its $20 million in revenues -- a whopping 43 percent.

Analysts have been outspoken in their concerns, and two financial firms stopped coverage of Corvis stock (see Corvis/Ciena Lawsuit Closer to Closure). "People shook their heads. One of the rules of the game is 'Never acquire your customers,' " says Frank Dzubeck, president of Communications Networks Architects, a Washington, D.C., consultancy. A customer buy angers other customers or causes them to want to be picked up, too, he says.

In Corvis's statement today, CEO David Huber is quoted as saying, "This investment is a unique opportunity that can strengthen Corvis' long-term financial position." But the attendant SEC filing outlines the risk clearly. If the deal closes, Corvis "will be indirect competition with our current and potential customers and [the deal] may therefore affect our ability to attract and retain customers," the company's filing states.

There also is the question of what Corvis is buying. In an internal memo sent to employees from Broadwing president Robert Shingler dated February 25, Broadwing isn't yet profitable -- not the best condition for a potential acquisition to be in. On an undisclosed day this week, a company spokeswoman says, Broadwing will release a financial update, which should shed some light on how well it's achieving restructuring. Stay tuned.

There are other reasons Corvis may wish to distance itself a bit -- if only for appearance's sake -- from the Broadwing deal. The pending sale raises the old chestnut about inter-relationships among Corvis CEO David Huber, the various business entities involved in this transaction, and others (see A Survey of the Corvis Food Chain).

As of last month when the Broadwing deal was first announced, for instance, Cequel III CEO and founder Jerald Kent was still chairman of the board of Avix, a project financed by the Huber-founded Optical Capital Group.

Corvis VP of investor and public relations Andrew Backman says the Broadwing transaction involved the board of Corvis, not Huber himself. Still, Huber owns about 24 percent of Corvis's common stock.

Dzubeck says it's unlikely that, given today's atmosphere of executive suspicion, Corvis would risk attracting this kind of attention if it weren't for a good reason. In his view, if Broadwing survives, so does a sizeable chunk of Corvis revenues. Broadwing also could prove a hedge for shareholders, including Huber, against the possible failure of Corvis itself.

Dzubeck says this is all speculation on his part: "No one knows exactly why these guys want this deal."

The possibilities are intriguing. There are signs, for instance, that Broadwing could add to a potentially larger suite of service provider deals. Cequel III, for instance, has minority stakes in Classic Communications, a cable operator in ten states, and AAT Communications Corp., a provider of wireless tower sites in the U.S. Clearly, there's room here for future investment synergies.

— Mary Jander, Senior Editor, Light Reading

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