Broadwing Inc. announced yesterday that it agreed to sell its $4 billion long-distance venture for $129 million in cash to C III Communications LLC, a company partly owned by Columbia-based Corvis Corp., a fiber-optics equipment supplier whose first customer was Broadwing.
The sale of the long-distance business, known as Broadwing Communications Services Inc., has been approved by the boards of directors at Broadwing and Corvis. The deal, subject to state and federal regulatory approvals, is expected to close by the end of the year.
St. Louis-based C III will continue to market under the Broadwing name and will assume its $375 million in long-term operating liabilities but not its debt. Details of C III's ownership will be disclosed in a filing with the Securities and Exchange Commission next month, said Andrew G. Backman, a Corvis spokesman.
Corvis, which reported $504.4 million in cash and cash equivalents at the end of 2001, is a co-investor in C III with Cequel III LLC of St. Louis.
The sale marks the end of an era for Broadwing, a company created when Cincinnati Bell bought IXC Communications in 1999 and recast itself under the name Broadwing Inc., gambling on new technology in the hope of profiting from the Internet boom. The firm, made up of Broadwing Communications Services Inc. and the local phone provider Cincinnati Bell, spent $4 billion over a four-year period to acquire and build an 18,700-mile national network of fiber-optic cables to carry Internet traffic at very high speeds.
Problems arose because other companies -- Qwest Communications International Inc., Sprint Corp., Williams Communications Group, AT&T Corp., WorldCom Inc. -- invested in similar networks to chase dreams of selling network space in a booming Internet market, creating tremendous oversupply for a market that soon crashed.
The complex relationships between some of the firms have helped the bust reverberate. Broadwing at one point owned $44 million in warrants in Corvis, and finished installing Corvis equipment in its network in April 2001. Broadwing is one of Corvis's six customers.
Broadwing's long-distance business was burning cash -- $39 million in the third quarter of last year -- and "the Cincinnati Bell franchise is something we needed to protect for our investors," said Thomas Osha, chief of staff for Broadwing, which plans to rename itself. The Internet boom didn't pan out, and oversupply kept pushing prices down.
"They've done the unthinkable; they've bitten the bullet and gotten rid of the broadband business," which creates a huge tax write-off and a healthier business for Broadwing, said Vik Grover, an analyst with Kaufman Bros. L.P., who upgraded his rating on Broadwing stock yesterday from "sell" to "hold."
Broadwing has 1,000 corporate customers and 15,000 customers for its long-distance voice business. But the business lacks an international network, as well as local networks that connect to customers' doorsteps, Grover said. In addition, he said, a considerable amount of its revenue is not actually cash. It strikes 20-year network leasing agreements for which the company collects cash up front the first year and records non-cash revenue on the books for the remaining 19 years.
But at such a deep discount, the purchase isn't a huge risk for the buyers, Grover said.
"From our perspective, it's an opportunity [with] attractive or promising returns," said Corvis spokesman Backman. Although Corvis will not be involved in day-to-day management of the new company, he said, "obviously, we know the Broadwing network pretty well . . . [and] over the long term, this could give us more business."