The company sold its slow-growth local phone business this week, but also is close to finalizing a deal with Exodus Communications, sources have confirmed, for its GlobalCenter Web hosting unit--a company once coveted for its collection of Internet data centers. The proposed $7 billion deal could be announced as early as Monday, according to sources, though no contracts have been signed, and it could still fall apart.
A spokeswoman for GlobalCenter refused to comment on acquisition rumors.
GlobalCenter was once thought to be a strong candidate for an initial public offering (IPO). It filed an amended prospectus in mid-June with the federal Securities and Exchange Commission for a tracking stock offering.
Analysts characterized the rumored sale of GlobalCenter as "disturbing." "Everybody in the industry is talking about building hosting centers alongside their networks," said Roger Wery, a communications analyst at PRTM, a management consulting firm.
"One possibility is that they're slicing themselves up to be sold," Wery said.
The company's situation underscores the conundrum facing many second-tier communications firms. Companies such as Global Crossing, Level 3 Communications and Broadwing, for example, all have enviable assets but lack a large enough customer base to flex their muscles in a manner similar to WorldCom--a company famous for deal-making. Yet they retain multibillion-dollar valuations, making themselves a tough sell in a market with limited buyers, according to some.
Global Crossing's deal to sell its local phone business to Citizens Communications for $3.65 billion makes sense to most, because profits from the local phone unit helped fund a new, nationwide fiber-optic network for Global Crossing. With construction complete, the local business served as an extraneous division, though it still generated revenue.
But the company's consideration of selling its Web hosting unit perplexes some, given the role these types of operations are playing in the Internet economy and the ability for these firms to extend their expertise to new markets, such as software applications hosting.
"It surprises me a little that they would consider divesting the Web hosting business, because it's a high-growth business," said Drake Johnstone, a telecommunications equity analyst at Davenport & Co., a retail brokerage firm in the Southeast. "I'm wondering if they think they can position themselves for a sale by just becoming a pure-play transport company."
Hindery, a veteran telecommunications executive with a love of deal-making, is responsible for dolling up an aging, debt-ridden Tele-Communications Inc. (TCI) and selling it to AT&T two years ago. Some analysts suspect Hindery is once again making his company into a lean takeover target, capable of attracting a large communications suitor with its new fiber-optic networks.
If so, Hindery is unlikely to be alone.
Analysts believe several other new communications service providers, including Qwest Communications International, Level 3 Communications and Broadwing, will eventually be acquired. With the scuttling of WorldCom's proposed acquisition of Sprint, both those companies could be among the buyers or sellers. Others such as VoiceStream Wireless, a major wireless company, are reportedly in play.
Now that the last round of multibillion-dollar mergers--including AT&T-Media One Group, Qwest-US West, Bell Atlantic-GTE and America Online-Time Warner--have closed or will soon be finalized, that could clear the way for major communications firms to embark on their next takeover attempts.
"No matter what Global Crossing said six months ago, it's not going to be one of the top five integrated carriers, so they could be a critical building block for somebody else," Wery said.
Deutsche Telekom, the German telecommunications giant, and BellSouth, a Baby Bell local phone company, frequently are considered among the industry's predators. Both companies have reportedly sniffed around several smaller communications players, sizing up Qwest, Global Crossing, Sprint and VoiceStream.
"There are quite a few companies for sale, but I also think there are several international companies that would like a footprint in the U.S.," Wery said.
Although earlier questions about whether the race to build new networks would create a glut of bandwidth capacity appear to have subsided, some wonder whether there are simply too many networks to be acquired.
"There are only a certain number of truly global players," Johnstone said. "DT, France Telecom, NTT and Vodafone AirTouch are big, but they're focused primarily on wireless."
In addition to the limited number of major international communications carriers, analysts say the climate has changed substantially, as regulatory and lawmaker scrutiny has increased and stock valuations have plummeted.
"A lot of things have changed in the past six to 12 months," Johnstone said.
What may give Hindery pause, however, according to sources close to the company, is Global Crossing's current valuation. When Hindery joined the firm at the end of last year, the company's stock was hovering around $50 per share, and thus, Hindery's stake in the firm was granted at $45 per share. Since that time, the company's stock has been halved, only gaining back some of its value in recent days.
Separately, Asia Global Crossing, a joint venture of Global Crossing, Microsoft and Softbank, will offer 53 million shares to the public in an offering that could be worth as much as $848 million. Asia Global Crossing, which is building an Asian network, will offer the stock at $14 to $16 per share, according to a filing with the Securities and Exchange Commission.