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By Ben Kolada

CenturyLink’s (NYSE:CTL) Savvis (NASDAQ:SVVS) acquisition, which closes today, is the largest telco-hosting deal on record, though we expect that it will be followed by a rise in smaller telco-hosting pairings. As the number of large hosting targets, which typically serve enterprises, continues to shrink, we anticipate that telcos that were unable to get their hands on prized enterprise properties will still look to enter this industry by consolidating the fragmented small and midsized hosting market.

Based on the most notable telco-hosting deals to date -- Verizon’s (NYSE:VZ) Terremark buy and CenturyLink’s reach for Savvis -- enterprises appear to be the primary market for large telcos looking to sell cloud services. However, we are noticing emerging interest from telcos looking to serve SMBs. Last month we saw Madrid-based telco Telefónica (NYSE:TEF) spend a reported $110m for cloud hoster Acens Technologies, which serves more than 100,000 SMB customers throughout Spain. On a much smaller scale, in February local competitive carrier CornerStone Telephone announced that it was picking up consumer and SMB-focused web hoster ActiveHost for an undisclosed amount.

We’ve written before that the greatest opportunity for telco-hoster combinations may actually be for regional and smaller telcos to buy smaller hosters. The hosting market is still fragmented, particularly among smaller providers, and many of these firms are experiencing capital constraints that are preventing expansion. Regional and local telcos will be able to take advantage of this fragmentation and acquire small complementary hosting providers without spending too much money, since smaller providers tend to garner smaller valuations, typically between 6-8 times last-quarter annualized EBITDA. However, if telco-hosting consolidation grows at this level, the acquired properties will most likely be colocation-focused, since most small hosting providers founded their business on colocation services.