Why Buying Savvis Makes Perfect Sense for CenturyLink

Hot on the heels of finishing its acquisition of Qwest, (s q) CenturyLink plans to buy Savvis, the data center provider with operations around the United States. The $3.2 billion acquisition mirrors the $1.4 billion buy of Terremark that Verizon completed earlier this month, as telecommunications providers buy their way into providing cloud computing and managed hosting services. This also moves CenturyLink (s ctl) from being an also-ran rural telecom provider to a player in the shifting telecom world.

The proposed acquisition includes $2.5 billion in cash and stock for Savvis shareholders and $700 million in assumed net debt. Savvis shareholders will receive about $40 a share, comprising $30 in cash and $10 in CenturyLink stock. The deal represents an 11-premium from last night’s closing price. The new hosting business will be based in St. Louis, Mo., and led by Savvis (s svvs) CEO James Ousley. Following the closing of the transaction, CenturyLink will employ approximately 50,000 people based on the total number of CenturyLink and Savvis employees as of April 26, 2011.

After Verizon (s vz) said in January that it planned to acquire Terremark, I spoke with Ousley, who essentially admitted his company was for sale to the highest bidder. Savvis is about twice the size of Terremark and has seen its stock price rise by more than 50 percent since the beginning of the year (and the Terremark deal). Together, the two companies will operate 48 data centers located in North America, Europe, and Asia with more than 1.9 million square feet of gross floor space, a national 207,000-route-mile fiber network and a 190,000-mile global access network.

CenturyLink got into the data center game when it acquired Qwest, which brought the rural telco provider 17 data centers as well as a burgeoning cloud services effort. Qwest had begun rolling out cloud offerings to its customers in 2010. Earlier this month,¬†I spoke with Christopher Ancell, president of business markets at CenturyLink, who said the merger gives CenturyLink scale and larger free cash flow, which could boost its deal-making capabilities, adding that¬†CenturyLink’s CEO Glen Post wasn’t afraid of doing deals. He also said CenturyLink was trying to figure out what customers want from Infrastructure-as-a-Service providers and what they want as Software-as-a-Service.

It appears those customer conversations led CenturyLink to pick up Savvis and attempt to jump into the big leagues. As the market for cloud services booms, telcos, and even cable companies (Time Warner Cable (s twc) purchased NaviSite in February), have been angling to get into the space mostly dominated by hosting companies, Amazon (s amzn) and a few others. The biggest question of this deal becomes who will buy Rackspace (s RAX). With ownership of the broadband pipes connecting data centers and their knowledge of a subscription-based billing model, telcos have plenty to offer cloud customers. Maybe they can even recreate the much-vaunted five nines that they offered with landlines.