Update: Troubled Exodus sells out to Cable & Wireless

Hosting provider Exodus Communications Inc. has agreed to sell the bulk of its business to London-based Cable & Wireless PLC (C&W) for about $575 million in cash and the assumption of about $180 million in liabilities, Exodus announced today.

The deal includes "substantially all of Exodus' and certain of its foreign subsidiaries' business," Exodus said in a statement on its Web site. U.S., Japanese and European customer contracts and employees, certain corporate and Internet data center assets, know-how, intellectual property, the Exodus brand and other resources will transfer to C&W, Santa Clara, Calif.-based Exodus said.

C&W picked 26 of Exodus' 44 operational data centers, plus four other fully equipped centers. Of these 30 centers, 26 are in the U.S., two are in London, one is in Frankfurt and one is in Tokyo, C&W said in a separate statement. Together, they represent about 4 million square feet of gross floor space, C&W said.

"We are taking over those data centers that fit best with our own data centers," explained Peter Eustace, a C&W spokesman in London.

Exodus customers serviced by data centers that aren't part of the buyout agreement will be invited to move to data centers that are, Eustace said.

"We will give those customers the opportunity to switch," he said, adding that C&W is "committed to hosting services and aims to provide excellent service" to its newly won customers.

Chipmaker Altera Corp., which uses Exodus for Internet access and for the hosting of its extranet, was pleasantly surprised by the news of the proposed acquisition.

"Exodus has not been in contact with us about it, but I see this quite positively because it gives Exodus much needed stability," said Paul Hollingworth, European marketing director at Altera. "We switched to Exodus from Pilot [Network Services Inc.] when they went bankrupt, so we were pretty dismayed when Exodus filed for Chapter 11."

Exodus serves 3,500 customers, according to C&W, which said it's taking over "substantially all" of those customers but wouldn't detail which companies are part of the deal.

C&W enjoys a good reputation but is mainly focused on large customers, said Maureen Coulter, senior analyst at research firm Dataquest Inc., a unit of Gartner Inc.

"C&W has good finances, good products and a good reputation. It focuses on large enterprise customers, and for those the acquisition will be great. However, it might not be cost-effective for C&W to keep the small and medium-size customers, and it could be that these clients have to go somewhere else," she said.

The first and foremost challenge for Exodus now is to make sure that the customers don't run before the takeover is completed, Coulter said.

"The difficult part for Exodus and the liquidators handling the sale is to keep the business running smoothly," she said. "This is going to be a very dangerous time for Exodus and an ideal time for competitors to come in and poach customers."

Customers that likely aren't part of the agreement with C&W are installed in data centers that aren't part of the proposed acquisition, said Robert Rosier, vice president of operations for Exodus in Europe and managing director of GlobalCenter Netherlands BV.

Centers that aren't part of the deal include four GlobalCenter Inc. data centers in Europe: in London, Paris, Amsterdam and Munich, Rosier said. GlobalCenter was acquired by Exodus in a $6 billion deal finalized in January.

"There are customer contracts that belong to local companies, and those contracts can't just be transferred to Cable & Wireless, especially not when the companies are operating under bankruptcy protection," said Rosier, noting that contracts signed at the corporate level, regardless of where the customer is installed, will be part of the deal with C&W.

"The situation will become clear in the coming weeks," Rosier said.

The takeover allows C&W to accelerate development of new services and integrated communications and e-commerce products, C&W said. Also, customers will be offered products from other C&W companies, such as those from recently acquired Digital Island Inc., which specializes in content delivery.

Exodus filed for Chapter 11 bankruptcy protection in the U.S. on Sept. 26 (see story). A buyout by C&W had been rumored, but the companies were tight-lipped and previously declined to comment on speculation.

C&W puts the cost of the Exodus takeover at $850 million, about $100 million more than the total value of $755 million that Exodus announced. The discrepancy exists because C&W has "a more conservative view and included absolutely every liability," Eustace said.

On the financial side, C&W said it anticipates that Exodus' business needs an investment of $250 million to make its cash flow break even. Exodus isn't expected to contribute positively to C&W earnings until the financial year ending March 31, 2005, C&W said.

The agreement, which has been approved by the Exodus board of directors, has yet to be approved by the U.S. Bankruptcy Court for the District of Delaware. A public auction is required by law to allow other bidders to submit higher bids, Exodus said. C&W expects the auction process to be completed by the end of January. The transaction should be complete in February, assuming C&W wins the bidding. The deal is also subject to regulatory approval.

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