BANGALORE/NEW YORK (Reuters) - Phone company CenturyLink Inc plans to buy Savvis Inc for $2.5 billion in cash and stock to beef up its data center business and cash in on growing demand for cloud services.
The deal comes at a time when regional phone companies like CenturyLink, which acquired rival Qwest for $10.6 billion earlier this month, need to find new ways to grow as consumers disconnect home phones in favor of Web and mobile services.
The Savvis buy, announced on Wednesday, would help CenturyLink boost revenue from data centers, which are large warehouses filled with computer storage servers. These centers help companies cut costs by hosting software that consumers can access via the Internet — a trend known as cloud services.
Data center operators have seen a spurt of recent deals, including Verizon Communications’ $1.4 billion purchase of Terremark Worldwide.
While analysts said the deal made strategic sense for both companies, some complained about the valuation.
The deal values Savvis at roughly 10 times expected 2011 earnings before interest, tax, depreciation and amortization, according to D.A. Davidson analyst Donna Jaegers, who had expected a multiple of 12, still below 14 for Terremark.
But she said the acquisition would probably succeed because investors owning 23 percent of Savvis had agreed to it.
The deal calls for Monroe, Louisiana-based CenturyLink to pay Savvis stockholders $40 per share, including $30 in cash and $10 in stock — an 11 percent premium to Tuesday’s close.
Shares of Savvis were up 9 percent at $39.26 on Nasdaq, while CenturyLink fell 0.3 percent to $40.21 on the New York Stock Exchange.
CenturyLink will also take on $700 million of Savvis debt.
“The deal is sensible and a good one, but seems to undervalue Savvis somewhat.” said Benchmark Co analyst Clayton Moran, who sees $45 per share as a fairer price.
A direct comparison with Terremark is not appropriate because Savvis operates a network as well as data centers, Savvis Chief Executive Officer James Ousley told Reuters.
Ousley said CenturyLink offered the best deal of various parties that had called after the Terremark deal. While Savvis will not solicit other bids, he said, it will review any unsolicited offers.
Savvis would pay an $85 million break-up fee if it bows out, according to one source familiar with the situation who said the deal came together in the last two or three months.
Another source said Verizon had ramped up Terremark’s price because the acquisition had desirable government contracts.
One law firm, Brower Piven, said it had started an investigation of the deal to determine whether Savvis failed to maximize shareholder value.
CenturyLink CEO Glen Post told Reuters that Savvis would boost the company’s $250 million annual data center revenue “significantly,” but did not give a target.
“Savvis is growing at double-digit levels,” Post said. “Certainly we wouldn’t want that to go down.”
After the deal closes, CenturyLink will have 48 data centers in Europe and Asia as well as North America. It has 16 now.
CenturyLink plans to merge its hosting operations with Savvis’ cloud businesses, with Savvis CEO Ousley in charge. Post said the deal was more about growth than savings, but CenturyLink does plan to save about $70 million in annual operating costs and capital expenditures as a result.
Barclays Capital and Bank of America Merrill Lynch were financial advisers for CenturyLink, and Wachtell, Lipton, Rosen & Katz and Jones, Walker, Waechter, Poitevent, Carrere & Denegre were the legal advisers.
Additional reporting by Nadia Damouni in New York; Editing by Sriraj Kalluvila, Saumyadeb Chakrabarty and Lisa Von Ahn