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CenturyLink borgs Savvis for $3.2bn

Rural telco morphs to cloudy IT provider

Bridging the IT gap between rising business demands and ageing tools

CenturyLink, which only a few years back was a rural telephone service provider, is now one of the major players in cloud computing thanks to its $3.2bn acquisition of Savvis.

The company, which was formerly known as CenturyTel, hails from Louisiana and has expanded its network through the $11.6bn acquisition of Embarq, the former local telephone division of Sprint Nextel, in 2009 and the $22.4bn buy of Qwest, which happened a year ago and which just closed on April 1.

The combination of the three companies makes CenturyLink the third largest telco in the United States. With Savvis expecting a $1bn run rate, the addition of Savvis to the existing Qwest-managed hosting and colocation businesses makes CenturyLink a real player in the modern cloud computing world.

Savvis, which has 2,500 customers worldwide buying its colocation, managed hosting, and network management services, was immediately in play as soon as Verizon snapped up cloudy infrastructure provider Terremark for $1.4bn back in January. That was a 35 per cent premium, and there was immediately a run up for the stocks of Savvis, Rackspace Hosting, and other suppliers of heavenly server, storage, and network slices. When Time Warner Cable bought NaviSite for $230m in February, all the publicly traded cloudy infrastructure suppliers got another boost.

CenturyLink is offering $30 in cash plus another $10 in CenturyLink stock for each Savvis share to do the deal. That works out to about $2.5bn, and that is an 11 per cent premium over the share price for Savvis at yesterday's market close and a 53 per cent premium over the market cap for the company before everyone started gambling in Savvis and Rackspace shares earlier this year. Under the deal, which has a breakup fee that CenturyLink and Savvis did not reveal during a conference call with Wall Street analysts, CenturyLink is also assuming approximately $700m in debts racked up by Savvis.

In the wake of the Qwest acquisition, CenturyLink had 18 data centers located in the United States that provided colocation, managed hosting (including virtual and physical servers), and network services. Savvis has 32 of its own data centers providing similar services. When you add up all that capacity, those 48 data centers account for more than 1.9 million square feet of floor space. The combined CenturyLink networks now span 207,000 miles of fiber nationally and 190,000 miles outside the US.

Glen Post, president and CEO at CenturyLink, said in the call that Savvis will be run as an independent subsidiary and that the Qwest data center operations would move over to Savvis and be put under control of Jim Ousley, currently chairman and CEO at Savvis. The Savvis unit will continue to be based in St Louis, Missouri, and it is expected that most of the company's 2,450 employees will be retained. After the acquisition, CenturyLink will have over 50,000 employees.

Post said that CenturyLink was interested in Savvis for all the obvious reasons: cloud computing is popular, and increasingly so. Post said that the total addressable market for cloud/managed hosting services was $29bn in the 2010 year and was expected to grow to $50bn by 2013.

That's about 20 per cent growth per year, and you just are not going to get that kind of growth from rural and urban consumers adding triple-play IP-based services. Ousley added that the Qwest data centers are only running at about 80 per cent capacity and that Savvis thinks it can crank up the efficiencies there and use the centers to build out managed hosting and cloud services. CenturyLink has no intention of selling off the overseas Savvis data centers, by the way, and wants to use them to provide extra services to multinational customers that are expanding in Europe and Asia.

The companies believe that there are about $70m in cost reductions they can make once the acquisition is completed, a process that will take more than three months to complete, according to Ousley.

The company execs and key shareholders who own 23 per cent of Savvis shares have already approved the deal, and now it will be up to Savvis shareholders to approve it – and then government antitrust regulators will look it over. Post said that this acquisition would be a lot easier to do than the Embarq and Qwest deals; the latter is still being integrated into CenturyLink.

Ousley took a number of questions on the call about whether the price that CenturyLink paid is sufficient. "Clearly, since the Verizon-Terremark deal was announced, there has been a lot of speculation," Ousley said. "We believe this is a very fair price for our company and for our shareholders."

While not being specific, Ousley confirmed that Savvis "pursued the market" ahead of accepting this deal, and added that as a public company Savvis "would not close the door" to other potential suitors. "This was the best deal we could find," he said.

Savvis was to host its first quarter financial results on a call this morning, which was canceled to discuss the deal. But Ousley did walk through the numbers a bit. The company posted revenues of $257m, up 19 per cent, in the quarter.

Overall hosting revenues rose by 26 per cent, to $191.8m, while network services revenues were up a mere 2 per cent, to $65.2m. Colocation revenues were just under $100m, rising 21 per cent, while managed hosting accounted for $92m, up 31 per cent. Savvis posted a $1.8m loss, which was a lot better than the $11.3m loss from the year-ago period. ®

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