In a three-way transaction billed by the participants as a “next-generation CLEC,” Speakeasy, a Best Buy company (BBY), has entered into an agreement to combine its business with Covad Communications Co. and MegaPath Inc., two competitive service providers that in March announced plans to merge. The combined privately held company is expected to have annual revenues greater than $500 million.
The Speakeasy transaction is contingent upon the MegaPath and Covad deal, which is expected to close in the third quarter of 2010. Financial terms were not disclosed. Best Buy, which acquired Speakeasy in 2007, will continue to be a minority investor going forward.
This transaction will combine Speakeasy’s small business voice and data services with MegaPath’s services for distributed enterprises, and make them available over Covad’s nationwide broadband network.
Upon closing, the companies plan to continue to serve the market through two divisions: a wholesale operating division and a direct, commercial division – most likely Covad and MegaPath, respectively, but branding may change when the deals close. MegaPath CEO Craig Young will become executive chairman of the combined businesses. Covad CEO Pat Bennett will continue in that role, managing the wholesale business, and reporting to Young. Bruce Chatterley, CEO of Speakeasy, will be president of the commercial unit in charge of all non-wholesale customer sales and marketing division.
Initial reaction from the analyst community is that the deal makes sense in terms of synergies among the three service providers, but that it also presents an opportunity for Best Buy to pull back from what may have been an ill-conceived step into the service provider business.
Analyst Donna Jaegers, senior analyst, telecom services for D.A. Davidson & Co., for one, said, “it’s very possible” the big box retailer wanted to step back, noting that Speakeasy does not make much money for Best Buy and to take it to the next level would have required a greater investment and that selling might be an easier route. “I was surprised that Best Buy would buy [Speakeasy] in the first place,” she said.
Judy Reed Smith, CEO of Atlantic-ACM, agreed, noting that it appears “Best Buy didn’t make a success of its acquisition of Speakeasy if it bought the company in 2007 and it’s dumping it already.” They must believe someone else, like service providers Covad and MegaPath, may be better at it.
Larry Hettick, research director for Current Analysis, agreed. “It didn’t make a whole lot of sense for Speakeasy to be part of an electronics retailer,” he said. “Service providers are best managed in a service provider environment and not by a consumer-oriented hardware supplier.”
