PAETEC, US LEC in $450 Million Merger

Another set of CLEC mergers announced on Monday highlighted an industry that continues to consolidate to better compete against RBOC rivals.

US LEC and PAETEC Communications Inc. said they are merging in a deal worth approximately $450 million, excluding debt. The numbers total $1.3 billion when adding in debt and preferred stock amounts.

Charlotte, N.C.-based US LEC is publicly held, and the so-called New PAETEC of which US LEC and PAETEC will become subsidiaries also will trade on the stock markets. PAETEC in mid-2005 had tried to go public but withdrew its IPO bid after it was not able to get the $12 to $14 per share price it expected. New PAETEC likely will be listed on the NASDAQ Stock Market under the ticker CLEC.

The merger is expected to close in the fourth quarter.

PAETEC is based in Fairport, N.Y., where the combined company will be headquartered. US LEC operations in Charlotte will be maintained, as well as in several other markets including Chicago, the Eastern corridor and along the West Coast.

US LEC specializes in IP, data and voice communications; PAETEC focuses on voice, data, security and other services. Both target medium and large businesses. The combined company will have more than 45,000 enterprise customers, executives said.

Arunas Chesonis, chairman and CEO of PAETEC, will hold those same positions once the transaction closes, and Richard Aab, chairman of US LEC, will become vice chairman.

US LEC security holders will own approximately one-third of the holding company while PAETEC security holders will own the remaining two-thirds. Once the deal closes, US LEC shareholders will be entitled to receive one share in the new holding company in exchange for each share of US LEC they currently own, and PAETEC shareholders will be entitled to receive 1.623 shares in exchange for each share of PAETEC they currently own.

US LEC and PAETEC will finance the transaction through a combination of debt and cash on hand. Deutsche Bank Securities Inc., Merrill Lynch & Co. and CIT Group Inc. have committed to finance $850 million for the transaction, which includes refinancing of both companies debt, US LECs Series A Preferred Stock and an unused $50 million revolver.

This merger provides US LEC shareholders with significant value and is a transformational event for our company, creating substantial opportunities for customers and offering shareholders of both US LEC and PAETEC the ability to participate in the upside potential of the combined company, said US LECs Aab.

[Aab] and I share a common vision for the industry and are firm believers in our business models, said PAETECs Chesonis. This strategic combination of highly complementary operating companies is about scale, scope and growth.

Deutsche Bank Securities Inc. is acting as financial advisor to US LEC and Skadden, Arps, Slate, Meagher & Flom LLP is acting as legal advisor. Merrill Lynch & Co. and The Blackstone Group are acting as financial advisors to PAETEC, and Hogan & Hartson LLP is acting as legal advisor.

Meanwhile, ratings service Standard & Poor’s put PAETEC on its “watch negative” list, while placing US LEC on “watch positive.” The opposing ratings “reflect the fact that the combined entity will either be rated ‘B’ or ‘B-‘,” explained Standard & Poor’s credit analyst Allyn Arden. “A key issue in resolving the CreditWatch listings is the expectation for future discretionary cash flow generation of the combined company. In determining the credit quality of the merged entity, we will review factors that include collocation synergies, network integration, headcount reductions and profitability metrics.”

PAETEC Communications Inc.
Standard & Poor’s

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