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The deal, which provides SBC with access to Metromedia's growing fiber optic network, expands SBC's infrastructure outside its 13-state operating region into 30 major markets. The dark fiber -- unlit strands of glass that require optical or electrical equipment before being used -- will allow SBC to offer last-mile services in new markets such as Philadelphia and Washington, D.C.
Metromedia's fiber is valuable not only because it offers so much capacity for the transmission of information, but because it's wired into customers' buildings, providing fast access to the information superhighway. Most companies racing to build fiber optic networks focused on long-haul networks, not connection within cities. (Metromedia is now building out inter-city and international networks as well.)
It's the second major deal with a Baby Bell company in seven months for New York-based Metromedia. In October, the company reached agreement to provide Bell Atlantic (NYSE: BEL) with dark fiber needed to access 50 major metropolitan networks. The deal is worth $550 million to Metromedia.
As a result of the October deal, Metromedia isn't the only company that benefits from today's announcement. Bell Atlantic took an 18.2% stake in Metromedia earlier this year as part of the deal -- a move that provided Metromedia with additional cash to build out its 51-city U.S. network. Bell spent $1.7 billion for roughly 9% of the company's common stock and 9% of convertible debt, making it one of Metromedia's largest shareholders.
It's paid off nicely so far. Although Metromedia's stock has fallen sharply with the market since April -- as investors shied away from unprofitable companies facing steep business costs -- Bell's 18% stake is worth roughly $3 billion. Not only that, but Bell Atlantic gets to benefit, albeit indirectly, from a competitor's move into its marketplace. The announcement sent Metromedia's stock up nearly 15% in early trading to $29 3/16.
Both Bell Atlantic and SBC, as well as a host of other telecom carriers, are pushing to expand their networks and the services they offer customers. Metromedia's focus on inner-city networks is very appealing to telecom carriers looking to capture business customers. These customers are really the sweet spot for carriers since they eat up lots of bandwidth and don't change carriers as frequently as consumers.
Investors should be very cautious of companies that have yet to turn a profit, require heavy up-front costs, and operate in industries subject to technology shifts. Metromedia is no exception and only investors interested in getting up to speed on the fiber optic infrastructure industry should look much closer.
Nevertheless, its business model is pretty easy to understand. It provides bandwidth at super-low prices by putting lots of extra capacity in the ground and leaving the fiber unlit. Its customers, companies like SBC that lease the fiber, have to outfit the fiber with equipment needed to light the network. That, plus the company's early start, gives it a nice advantage over competitors.
Metromedia is expected to own a network containing 3.6 million miles of fiber in 67 U.S. cities by 2003, according to a Robertson Stephens report.
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