NaviSite Divests For Breathing Room

Applications service provider Navisite (NASDAQ:NAVI, news, filings) [a subsidiary of Time Warner Cable (NYSE:TWC, news)] today divested itself of its Lawson and Kronos business lines, selling their customer base to Velocity Technology Solutions for some $56M.  Velocity will also take over the lease for the Minneapolis data center from which these products are run.  With this transaction, NaviSite says they will be better able to focus on their core business and further their entry into the cloud services market.  Of course, $56M added to the balance sheet (currently at $4M in cash & equivalents) doesn’t hurt either.

Now, NaviSite has been rebounding strongly since summer.  They were basically left for dead when the credit markets tanked last winter.  But they rode out the storm despite their cash position, running practically on empty all year and defying the market’s premature verdict.

Yet, while the crisis had ebbed substantially, one still knew a move like this was on the horizon from their most recent 10-Q:

In order for us to comply with our credit agreement’s senior-leverage ratio and fixed-charges covenants for quarterly periods in 2010 and beyond, we will need to achieve some of the following measures:  (i) increase our Earnings Before Interest, Taxes, Depreciation and Amortization (“EBITDA”), (ii) successfully complete the sale of certain non-core assets (e.g., certain co-location data centers or other non-strategic assets), a portion of the proceeds from which would be used to repay debt, (iii) execute a debt-reduction plan, (iv) refinance our existing debt arrangement and (v) modify one of our significant data-center lease agreements.  If the aforementioned measures are not sufficient to maintain compliance with our financial covenants, we would need to seek a waiver or amendment from the syndicated lending group.

Since (i), (iii), and (iv) were rather unlikely given the limitations of the company cash position and the unhelpful macro economy, some combination of  (ii) and (iv) pretty much had to happen soon.

Left unsaid in the PR is just how much revenue and EBITDA are going along with the divested assets.  But given that the sales price was about a quarter of the enterprise value of the whole company, it will certainly be material.  However, NaviSite now has the breathing room it has needed for a long time just when they need it to claim territory in the emerging cloud services marketplace.  Hopefully that will make the shrinkage worthwhile.

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Categories: Datacenter · Mergers and Acquisitions