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Interoute Looks Tasty

1:55 PM -- Pan-European network operator Interoute Communications Ltd. announced today that its revenues, at €139 million (US$195 million) for the first six months of 2010, are growing, its profitability is improving, and it's benefiting from the trend toward hosted services. (See Interoute Boasts Sales Growth.)

Interoute owns an upgraded transport network of 55,000 kilometers (with plenty of dark capacity) that spans the whole of Europe, runs 21 metro networks, has eight data centers and 32 collocation centers, offers a range of content delivery and hosted computing and applications services, and claims to be interconnected with "every major European, Asian and US operator." So why hasn't it been acquired?

I think it's only a matter of time. Physical network and hosting assets are becoming increasingly key to service providers' cloud and converged networking/IT services strategies, and extensive assets such as those owned by Interoute, which can also meet the growing demand for wide area Carrier Ethernet services and help it tap into just about every hot services space going, are scarce. (See Wyless, Interoute Team on M2M, Interoute Opens Moscow Office, Interoute Extends MPLS to the Office, Interoute Turns a Profit, Plans M&A, Interoute Reaches Into Turkey, Interoute Boosts Its Capacity, Interoute Speeds Bandwidth Service, Interoute Unveils Internet Barometer, Interoute Supports IPv6, and Infinera Muscles Into Interoute.)

A company with some serious financial chops that could combine Interoute's existing capabilities with a broader IT services portfolio could position itself as a significant challenger to Europe's next generation service providers.

Interoute has had a patchy financial past, and has been bailed out a few times, but now, with its growing revenues and operational profitability, appears to be much more secure. (See Interoute, Tecom Partner and Interoute's Back From the Dead.)

So who might be interested? Well, there are a number of operators in the Middle East that are looking to branch out from their domestic markets that might see Interoute as a neat investment, while NTT Communications Corp. (NYSE: NTT) could do worse than consider another acquisition that would help reduce its current operational costs in Europe and help make the most of its Dimension Data acquisition. (See NTT POPs Into Europe and NTT Splashes $3.2B on DiData.)

Then there's China Telecom Corp. Ltd. (NYSE: CHA). It has aspirations to be a much bigger player in EMEA, and while it has talked about wanting to buy IT services assets to go with its small but emerging wholesale and enterprise business in Europe, Interoute would give it a lot of new capabilities to play with; an instant sizeable European presence, with growing revenues; and a platform from which to base further services expansion. And it's not like China Telecom doesn't have the bank balance to make such a move. (See China Telecom Plans Euro M&A.)

Of course, this is just me thinking aloud. But the possibilities are interesting, and Interoute now looks like a business that's ready to be taken on to the next level.

Who will start the bidding at €750 million ($1.05 billion)? At its current run rate, that would be about three times annual revenues and about 15 times EBITDA. That's not unreasonable, is it?

Come on, now... don't be shy.

— Ray Le Maistre, International Managing Editor, Light Reading

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