Match made in heaven?

Contact: Ben Kolada

As telcos look to stem losses in their business divisions and hosters look for partners to help them continue revenue growth, the two industries are increasingly merging together. The recent Terremark and NaviSite sales have already set a new record for dealmaking between these two sectors, eclipsing the nearly $1bn worth of deals that we saw in 2010. And unlike in other industries, where companies or assets may be acquired and then squandered, the strategic potential that telcos and hosters offer each other is too valuable to be wasted, and pairings between the two industries usually benefit both sides. (Click here to check out our longer report on this growing trend.)

Verizon’s Terremark purchase represents the most synergistic pairing that we’ve seen between these two industries. But the hosting sector in general can benefit from partnering with complementary telcos. Perhaps the greatest opportunity may actually be for regional and smaller telcos (which we loosely define as providers with revenue between $100-500m) to buy smaller hosters. The hosting market is still fragmented, particularly among smaller providers, and many of these firms are experiencing capital constraints that are preventing expansion. Regional and local telcos will be able to take advantage of this fragmentation and acquire small complementary hosting providers without spending too much money, since smaller providers tend to garner smaller valuations.

Benefits for hosting providers partnering with telcos:

  • Telcos often already have some level of existing Internet infrastructure services that can be complemented by purchasing providers to round out those offerings or expand geographically.
  • Telcos have access to capital to support continued growth.
  • Telcos have long histories of service provision for both large and small business.
  • Telcos have institutional knowledge with respect to offering multiple products and services simultaneously across more than one geography, often with widely varied requirements and expertise.

Source: Tier1 Research

Time Warner Cable picks up NaviSite; is InterNap next?

Contact: Ben Kolada

In the second telco-hosting rollup in less than a week, Time Warner Cable is acquiring NaviSite for $230m in cash. This is TWC’s first foray into enterprise hosting and cloud computing services, and marks the end of a tumultuous year for NaviSite that included defending itself from an unsolicited take-private and continuously retooling its business toward enterprise-class services.

TWC, the second-largest cable operator in the US, is paying $5.50 per share, representing a 33% premium over the closing price on February 1. Including the assumption of cash and debt, TWC’s offer gives NaviSite an enterprise value of $277m, or 2.1 times trailing sales and 10.8x trailing EBITDA. While the offer is roughly in line with broad market valuation, it is far below what Terremark received from Verizon. In that deal, announced just last Friday, the target was valued at 5.8x trailing sales and 24.7x trailing EBITDA. Of course, we might argue that Terremark deserves its premium, since it is much healthier and larger than NaviSite. Terremark has 16 datacenters (compared to NaviSite’s 10) spread across a large international footprint, a robust and growing cloud platform and more than twice the sales of NaviSite.

While NaviSite is set to be acquired at a lower valuation than Terremark, TWC’s bid represents a level NaviSite hasn’t seen on its own since late 2007. Further, it’s substantially above the offer that NaviSite attracted just a half-year ago. In July 2010, Atlantic Investors, which already owned one-third of NaviSite’s equity, made an unsolicited offer for the remaining shares of the company. Atlantic Investors’ bid of $3.05 per share valued NaviSite overall at $128m. Time showed that NaviSite was right in rejecting that offer, which isn’t always the case in these unsolicited bids. After spurning the offer, the company continued in its dogged determination to become an enterprise-class hosting provider throughout 2010 and divested some $74m in non-core assets to get there.

After NaviSite’s sale, speculation is intensifying about which hoster will be acquired next. We’ve written before that Savvis is an obvious target, and Rackspace is the constant focus of acquisition speculation. We might add Internap Network Services to that list. The Atlanta-based company’s shares are up 6% in mid-Wednesday trading, continuing a run since the Terremark announcement on January 27. One reason we might point to a trade sale for Internap is that the chief executive has done it before. In January 2009, the company appointed a new CEO, Eric Cooney, who has a history of growing companies and leading them to successful sales. He was previously CEO of Tandberg, which was acquired by Ericsson for $1.4bn in 2007. Since Cooney’s appointment, Internap’s shares have climbed 170%, giving the company a market cap of slightly more than $400m. Look for a full report on TWC’s pickup of NaviSite in tonight’s Daily 451.