CenturyLink Buys into the Cloud (CTL, SVVS, VZ, T, RAX)

Just last month CenturyLink, Inc. (NYSE: CTL) complete its $12.2 billion acquisition of Qwest. At the time the deal was announced, it seemed to make little sense because neither Qwest nor CenturyLink had any significant presence in wireless cellular service, and that their landline businesses were losing customers.

This morning, CenturyLink has said that it will acquire Internet infrastructure provider Savvis Inc. (NASDAQ: SVVS) for around $2.5 billion in cash and stock. The deal follows the acquisition of Terremark Worldwide, Inc. by Verizon Communications, Inc. (NYSE: VZ) in January for about $1.4 billion. This deal makes somewhat more sense because it gives CenturyLink a foothold in the cloud computing business.

CenturyLink primarily offers communications services to mostly underserved rural parts of the US. These areas are largely overlooked by the big companies like Verizon and AT&T (NYSE: T) because there’s a lot of empty space between customers, space that needs to have expensive cable laid that doesn’t offer much return.

The same situation obtains for CenturyLink, but the company must be thinking that there is some profit to be mined there from the more than $7 billion that the Obama administration included in the stimulus bill to expand broadband access to rural America. While all of the funds have been allocated, so far only about $400 million of that amount has actually been spent. There’s still opportunity there and that must be what CenturyLink is looking for with its bid for Savvis.

Savvis shares posted a new 52-week high when Verizon bought Terremark, as did another player in its sector, Rackspace Hosting, Inc. (NYSE: RAX). Rackspace came within pennies of another 52-week high today, hitting $45.25 in its 52-week range of $15.15-$45.41. Savvis is up nearly 9%, to $39.21 on the $40/share offer from CenturyLink. CenturyLink itself is off about -0.72%, at $40.03, within a 52-week range of $14.16-$46.87.

Paul Ausick