CenturyLink Sells Its Colo Business to Fund Level 3 Deal
CenturyLink headquarters in Monroe, Louisiana. (Photo by CenturyLink)

CenturyLink Sells Its Colo Business to Fund Level 3 Deal

In a move that was anticipated before, during, and after its $34 billion acquisition deal for Level 3 Communications announced earlier this week, CenturyLink — America’s third-largest phone service provider — now says it is selling its colocation business, which includes some 57 data centers in North America, Europe, and Asia.

The move will net CenturyLink around $2.15 billion in cash plus $150 million in stock in a new joint venture company, being formed by buyers Medina Capital and BC Partners.

The new joint venture has yet to be named, although Data Center Knowledge has learned it will become a collection of several IT service providers, including cybersecurity — not just a colo provider.  Co-buyer Medina Capital is based in Coral Gables, Florida.  According to records, Medina began funding security and analytics services businesses and activities in 2012, making only two acquisitions since that time, both in 2013.

BC Partners, on the other side of the scale, is a three-decade-old London-based private equity firm specializing in what the equities industry calls “defensive growth” plays: assets that are non-cyclical in nature, and whose gains come more from revenue returns than from capital growth.

The Value of Savvis

What these new venture partners are getting for their $2.15 billion plus stock is Savvis, which CenturyLink acquired in 2011 in a $2.5 billion cash + stock deal.  (It’s been reported that CenturyLink was seeking $2.5 billion for today’s deal, but settled for $2.15 billion.)  Collectively, Savvis boasts more than 2.6 million feet of floor space worldwide, serving 3,500 customers connected by about 401,000 miles of cable.  Its expansions over the past few years in Canada earned praise from IDC MarketScape just last month.

Savvis’ secret, as Data Center Knowledge reported in November 2015, is that it leases most of the properties in its portfolio, except for those acquired during the 2011 Qwest deal.  It was a way to keep costs down, but as CenturyLink CEO Glen Post told analysts during a quarterly earnings call that month, that strategy wasn’t paying off.

“For us to really grow the colo business, it requires really more CapEx than we’ve been willing to put in the business,” said Post [our thanks to Seeking Alpha for the transcript].  “We said that, up-front, that we weren’t going to invest heavily in the data centers — that we felt they were a synergistic asset that we could grow with the rest of our business.  However, with the valuations. . . we think our cash flow could be used for investments that can drive higher returns, basically, and drive better shareholder value.”

Last Monday, Post told analysts that growth for his firm’s colo business was basically flat — with revenue declining 0.2 percent annually.  This while his content delivery network service was growing 15 percent annually, and managed security services 16 percent.  When asked whether Level 3’s data centers would add anything to CenturyLink’s portfolio, Post sloughed off the question as not “a major consideration of ours.”

The Security Angle

For its part, the new and unnamed joint venture’s strategy will be to combine Savvis’ data centers with a treasure trove of established security services, all of whose deals were also announced today:

  • Addison, Texas-based Brainspace is one of the joint venture’s acquisitions, for an undisclosed sum. It specializes in machine learning of information through the analysis of textual documents in multiple languages, drawing a collective database of conceptual connections deduced from that text.
  • Miami-based Easy Solutions, an electronic fraud protection service, is being acquired by the joint venture, again for an undisclosed sum. That company’s engineers have recently been applying a venerable, old artificial intelligence algorithm called isolation forests to deduce behavior patterns from a system using alternative methods to traditional machine learning.
  • Cryptzone, based in Waltham, Massachusetts, is a known player in the security space. It’s a leading proponent of a concept called software-defined perimeter — a way to render virtualized networks more secure by altering the perception of its “endpoints” to networks on the outside.
  • Scotts Valley, California-based Catbird is an advocate of a concept called microsegmentation — effectively rendering small components of a network asset as belonging to a domain, without housing them all within the same volumes, VMs, or resources. It’s a way of breaking networks into very small pieces, distributing them everywhere, and yet have them still all work as though they were seamlessly woven together.

Clearly, the new group’s plan is to use scientific security means as a differentiator for its colocation services, offering more than just a lot of space and reliable power.  But since Savvis was leasing a lot of that space from asset owners, it will be interesting to see how the new group plans to deploy all these new, and very high-minded, services on systems it does not (yet) own.

On Friday, Medina Capital founder and managing partner Manuel D. Medina issued this statement:  “We’re combining a worldwide footprint of best-in-class data centers with cutting-edge security and analytics services, integrating these capabilities into a global, highly secure platform that meets today’s critical enterprise, public sector and service provider demands for cybersecurity, colocation and connectivity.  Our customers will be able to leverage a suite of on-net security and advanced analytics services deeply integrated into the data center.”

In an interview with Boston Business Journal published Friday, Cryptzone CEO Barry Field said, “We don’t see anybody else in the infrastructure world who’s coming at it from a cybersecurity perspective.”

The new group expects to close its deal with CenturyLink in the first calendar quarter of 2017, which is not a lot of time to execute this deep integration plan.  CenturyLink executives will likely provide much further comment on the deal next Thursday, during a presentation at a Wells Fargo conference on media and telecom in New York City.

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