Corvis JV buys Broadwing network

Broadwing has agreed to sell its broadband assets, a roughly four-year, $4 billion investment that includes an 18,500-mile national fiberoptic network, for $129 million.

The sale, expected since at least January when Broadwing announced it was looking to sell the unit, is not as remarkable as the buyer: C III Communications, a joint venture between investment firm Cequel III and optical equipment vendor Corvis, which counts Broadwing as one of its few customers and whose gear comprises much of the network in question.

Despite the connection, a Corvis spokesman said the vendor views the deal purely as an investment opportunity that will provide the company with attractive returns and “financial diversification.”

“We know the advantages of the network--reducing operating costs and allowing service providers to turn up services very quickly,” said a Corvis spokesman. “That helped in our decision-making process. We know what the network can do.”

Dave Dunphy, principal telecom infrastructure analyst with Current Analysis, was skeptical of Corvis’s description. “If I wanted to ‘diversify,’ I wouldn’t do it by buying one of my customers,” he said, adding, “I don’t think it’s a good investment [for Corvis].”

For Corvis, which has had difficulty finding new customers, the deal was more likely a way to keep afloat a customer whose network had become a showcase for $200 million worth of Corvis products, Dunphy said. The move also keeps that gear from entering the used equipment market, where it might interfere with Corvis’s current sales efforts, he said.

Even in its role as investor, it’s unclear what future business Corvis can expect from the new Broadwing. A Cequel III spokesman wouldn’t comment on any ambitions to expand the network in the future, which already reaches “over 90% of major cities,” according to Broadwing’s Web site. However, a Cequel III spokesperson said the new venture, headed by Charter Communication founder Jerry Kent, would be “interested in working with the cable sector,” which could conceivably introduce cable clients to Corvis.

Broadwing, which was formed from Cincinnati Bell’s purchase of IXC in 1999, was unable to enjoy much of the cost-saving benefits promised by Corvis’s gear, having been squeezed by an unforgiving wholesale market. The carrier made valiant self-preservation efforts, shifting its focus to enterprise customers that today make up 45% of the company’s customer base and introducing innovative new products such as the MultiConnect, a successful wide area network product that analysts say none of Broadwing’s competitors could match.

But ultimately, said Kate Gerwig, principal telecom services analyst for Current Analysis, Broadwing couldn’t reconcile its risky, bubble-born ambitions with the more conservative culture of Cincinnati Bell, and when the industry crashed, Broadwing ended up saddling its parent with billions of dollars in debt.

For Broadwing Inc., Cincinnati Bell’s holding company, which will retain 5% ownership of the new company, the deal was a way to cut its losses on a broadband division that was quickly burning cash--as much as $39 million in 2002’s third quarter alone. Since the value of the network was dropping, Broadwing unloaded it at a bargain rather than being forced to sell it later for even less, said Broadwing chief of staff Tom Osha. “We did it now to unlock some value for shareholders.”

C III arguably has a chance to succeed where Broadwing failed, since the asset purchase does not include Broadwing’s long-term bank debt. CIII will assume long-term operating commitments that a spokesman put “in the ballpark” of $375 million. And it will continue to operate under the Broadwing name, serving a mix of wholesale and enterprise customers, though it will be managed by C III Communications.

Neither Cequel III nor Corvis will reveal their respective stakes in the new company until they file the information with the Securities and Exchange Commission at the end of March.

Cequel said employment offers will be made to all current Broadwing employees, though Jerry Kent would be the president and CEO of the post-acquisition Broadwing, while Broadwing Inc. CEO Kevin Mooney will remain with the holding company.

The big loser in this deal is Cincinnati Bell, which will end up footing the bill for the $2.75 billion in long-term debt Broadwing leaves behind with the holding company, Broadwing Inc.

“I guess [Cincinnati Bell] thought it was worth it,” said Gerwig.