C&W to acquire Digital Island for $340m

London-based Cable & Wireless today announced plans to acquire weakened U.S. Internet infrastructure service provider Digital Island in an all-cash transaction valued at $340 million.

If approved by U.S. regulatory bodies, the merger would make San Francisco-based Digital Island a wholly owned C&W subsidiary. After closing the deal, Digital Island will be led by its current management team.

C&W agreed to purchase all of Digital Islands’ outstanding common stock for $3.40 per share and absorb $49 million of debt. In a statement, the British telecom company said the merger would strengthen its position as a leading global Web-hosting and content-delivery services provider.

Already been approved by both company’s boards, the deal is C&W’s most significant step yet to expand its global reach, particularly in the U.S. The acquisition would double C&W’s capacity in managed hosting and create a new content-delivery business, a Digital Island spokesman said.

The deal also helps stabilize Digital Islands’ business plan and its ability meet customer demand for increased e-business profitability on a global scale, the spokesman said. With financial support from C&W amid unfavorable market conditions, expanded reach from 35 countries around the world to 70 countries, and ability to retain its corporate identity, the deal is a win-win, he said.

“This gives us a pretty strong capability in the market at a time when it’s most effective to have it,” the spokesman said. “Net-net it's really part of a longer-term plan and vision to create a global reach in scale behind our operations.”

Two weeks ago, Digital Island announced a $1.19 billion second-quarter loss that included a $1 billion asset write-off. The company has already cut 12% of its work force this year and recently said it plans to drop another 10% by the end of June. The spokesman said the announced cuts were unrelated to the acquisition and would be executed.

“We will make the cuts we said we were going to make between now an June,” the spokesman said. “We grew last quarter but at a smaller rate than we had originally planned, and we ramped hiring to support a much faster growth rate.”

Once traded as high as $148 per share, Digital Island was up 8% in midday trading to $3.38 per share.

The acquisition is expected to close within 30 days, and C&W said it would use existing cash resources to finance the deal. Though C&W expects earnings to suffer in the near term, earnings would return to positive by the end of the third year.