Interland Sells Dedicated Server Business to Peer 1

Interland is selling its dedicated server business to Peer 1 Networks, which acquired Server Beach last year. Peer 1 said it is paying $14 million for 8,300 dedicated servers and 115,000 square feet of data center space in facilities in Atlanta, Miami and Fremont, Calif.

Peer 1 president and CEO Geoffrey Hampson called the deal an "outstanding fit" and promised little immediate change for Interland customers. “This transaction adds a large customer base, skilled staff, solid dedicated server equipment and three data centers to Peer 1 Network’s existing infrastructure," Hampson noted.

The dedicated server market has been the hottest segment of the web hosting industry over the past two years, as discount pricing allowed hosting resellers and web entrepreneurs to run their own server for less than $100 a month. The popularity of discount dedicated servers spurred huge growth for providers such as EV1Servers.net and The Planet. But dedicated hosting is more capital-intensive than other types of hosting, as providers must lay out cash to purchase hardware and licenses for each server.

About half of Interland's dedicated servers run on Microsoft software, with the remainder on open source operating systems, according to the Netcraft Hosting Provider Server Count, which tracks the number of web-visible computers at hosting companies.

In a regulatory filing, Interland noted that the sale allows it to realize "significant savings," including costs related to the ongoing purchase of dedicated servers and bandwidth, and the cost of operating the three data centers, which are staffed by 139 employees. Interland said it expects to take a $15.5 million charge to earnings to reflect a decline in the value of assets included in the deal.

Peer 1's press release noted that the company is borrowing $28 million to fund the deal and repay some of its debt, and issuing $7 million in preferred stock. Private equity fund Celerity Partners is buying $4 million of the preferred shares, with company insiders buying the remainder. Peer 1 said the loan will be repaid through funds from the sale of assets or stock, suggesting Peer 1 is mulling further deals.

Peer 1 is headquartered in Vancouver, Canada and its shares are traded on Toronto's TSX Venture Exchange. The company has 12 data centers and and IP network that spans much of North America. Last October it purchased ServerBeach for $7.5 million.