Level 3 Buys Savvis CDN

Savvis Communications Corp. (Nasdaq: SVVS) is selling off its content delivery network to merger-happy Level 3 Communications Inc. (Nasdaq: LVLT), building up funds for what promises to be a continued surge in managed IT services.

Taking no time off for a holiday hangover, the companies announced today that Level 3 will acquire Savvis's CDN business for $135 million in cash, a deal expected to close by the end of March. (See Savvis to Sell CDN.)

Savvis will pour the cash into the $200 million construction of four U.S. data centers, in the Atlanta, New York, San Jose, and Washington, D.C. areas, with opening dates about a year from now. (See Savvis Opening Data Centers.)

Savvis stock was up 91 cents (2.5%) at $36.83 by early afternoon, while Level 3 shares had dropped 10 cents (1.8%) to $5.56.

The move has been expected of Savvis for a while. Since the spring, the company had talked of "strategic options" for the CDN business, and by November, word was circulating that the company had received multiple offers. One estimate at the time said the CDN business could go for $120 million. (See Will Savvis Sell Its CDN?.)It's easy to see why Savvis would be disenchanted with the CDN business, which has "continued to have relatively slow growth," as the company noted in an October Securities and Exchange Commission (SEC) filing. The business racked up just $15 million in revenues for the nine months ending Sept. 30. And while Savvis scored Microsoft Corp. (Nasdaq: MSFT) as a CDN customer, it hasn't snared many other big names.

Instead, Savvis wants to focus on IT services including hosting and managed VPNs, an increasingly robust business. In addition to those new data centers, Savvis recently announced a network upgrade for delivering "IT Infrastructure as a Service." (See Cisco Wins at Savvis.)

Managed storage, in particular, has been a growing component of managed IT services -- and a hot merger topic, apparently. Last week, Seagate Technology Inc. (NYSE: STX) shelled out $185 million to acquire EVault Inc. in a deal set to close by March. And the summer saw a small flurry of partnerships and mergers focused around managed services, storage in particular. (See Last Minute Shopping for Seagate and Managed Services Resurge.)

Level 3, meanwhile, will use the acquisition to bolster its own content delivery services, which germinated when the carrier picked up Vyvx as part of its WilTel acquisition of December 2005. (See Level 3 Takes Out WilTel.) Vyvx, which broadcasts live content via cable and satellite and also delivers radio and TV ads, tallied $88 million in revenues for the nine months ending Sept. 30, according to a Level 3 SEC filing.

An increased presence in the CDN world pits Level 3 against such players as Akamai Technologies Inc. (Nasdaq: AKAM) and Limelight Networks Inc. (Nasdaq: LLNW).Level 3 has been on a buying spree for more than a year, pursuing a stated mission to become the United States's largest CLEC. Beyond WilTel, some of its more notable purchases have included Broadwing and TelCove. (See Level 3 Buys Broadwing for $1.4B, Level 3 Takes TelCove, and Level 3 Still Hungry for Fiber.)

Craig Matsumoto, Senior Editor, Light Reading