By Scott Denne Jim Davis
Verizon (NYSE:VZ) picked up EdgeCast Networks in a move that's likely to shuffle market share and partnership arrangements in the CDN space. The deal will likely alter Verizon's current partnership with Akamai, the largest CDN vendor.
We estimate the enterprise value of the transaction at $395m, making it the largest acquisition of a CDN company and valuing EdgeCast at about 2.9x the $135m annual revenue that it expects to have by the close of 2013. The deal values EdgeCast slightly below the 4.8x that Akamai fetches and roughly in line with the 3.1x median for CDN purchases in the past decade, according to The 451 M&A KnowledgeBase.
Akamai gets about one-fifth of its revenue from resellers. While it's not clear how much of that comes from Verizon, it is clear that it will lose some revenue when that partnership ends. Despite that, this could be an opportunity for Akamai or other CDNs to land additional carrier partnerships as telcos that resell EdgeCast, including Deutsche Telekom and TELUS, may not be comfortable reselling a Verizon service - not to mention the multi-tenant datacenter providers that partner with EdgeCast and also compete with Verizon's Terremark.
Getting into the CDN business brings Verizon another source of revenue to help offset its declining fixed-line revenue, a need that's driven most of its M&A spending in the past couple of years as it has bought companies such as Terremark for $1.4bn, CloudSwitch for an estimated $80m and fleet management vendor Hughes Telematics for $612m. And that's in addition to the $130bn it paid for the 45% of Verizon Wireless that it didn't already own.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.