Deja Vu for Exodus

Cable & Wireless is about to disappoint someone. The big question: will it be the employees and customers of its Exodus hosting unit, or British investors who are bidding C&W shares higher on the expectation that the company will ditch its US operations?

C&W shares gained 5.7 percent Monday in London after an article Sunday in The Independent that treated the closure of Exodus as a done deal. That followed a series of speculative reports last week suggesting that C&W directors were leaking details of the coming shakeup. British analysts and investors have been critical of the company's US strategy, which the UK media links to the fortunes of C&W chairman Graham Wallace.

This must seem like deja vu all over again at Exodus, which spent much of last year trying to reassure investors and customers about its financial future before it filed for Chapter 11 protection in late September.

Cable & Wireless acquired most of Exodus' assets earlier this year, including 26 of its 44 operational data centers totalling about 4 million square feet of gross space. More importantly, the deal included 3,200 customers - down from more than 4,500 in the first quarter of 2001, but nonetheless an enviable entry point into the US market. Its US holdings also include the former Digital Island, with a content delivery and streaming services network that reaches more than 14,000 ISPs worldwide.

But even before the deal was concluded, C&W began to see Exodus as an asset that was deteriorating in value. The purchase price was initially set at $850 million last Nov. 28, with a mechanism to adjust the purchase price based on the value of Exodus' customer accounts. The price had already dropped by $100 million to $750 million by the time the deal was finalized in early February.

If bankruptcy court motions are any guide, that trend has continued. Cable & Wireless has asked the bankruptcy court for a refund of up to $135 million, of which EXDS Inc. has already paid $50 million. The two parties are negotiating the size and structure of the remainder of any refund, which could lower the final price of the deal to less than $500 million.

That erosion in the value of the US hosting business has no doubt complicated C&W's ability to defend the acquisition to analysts and investors on its UK home turf, who have seen the value of C&W shares fall from 350 pence when the deal was signed to 138 pence this week