Magellan Hill Offers Equity Play

Holding company Magellan Hill Technologies plans to launch in August a new company, Magellan Hill Partners, that will be built by and for agents with an eye toward a sale in five to seven years and an equity payout for the channel.

Magellan Hill Partners is a sister company to Magellan Hill, a reseller formed in 2006 by veteran telecom executive Brad Bono. Bono is CEO of both companies as well as the holding company. Magellan Hill Partners will be a reseller for Magellan Hill, which has built up a back-office and customer support infrastructure over the past three years. Magellan Hill also will maintain direct sales and its existing network of referral partners and smaller agents.

Bono told PHONE+ Magellan Hill Partners is being formed to provide a liquidity event for top-performing agents who usually are cut out of M&A transactions involving telecom companies they helped build. Magellan Hill Partners, he said, will recruit 10 to 20 large agents to build $50 million to $100 million. Then, in five to seven years, the base will be sold. Bono expects the company to sell for one to two times annual revenue.

Post sale, an agent will have the choice to remain an agent for the acquiring company and continue receiving residuals or they can take a payout – as much as 50 percent of the value of their base for agents billing $250,000 a month or more. An agent billing $100,000-$249,999 will get 20 percent. $100,000 in monthly billings qualifies an agent for equity interest.

So, for example, an agent base that bills $250,000 in monthly revenue would be valued in the transaction between $3 million and $6 million, so the agent would receive $1.5 million to $3 million.

Existing agents for Magellan Hill can move into the Magellan Hill Partners program when they reach $100,000 in monthly billings. New agents can go directly to Magellan Hill Partners.

Vested agents will be part of the Magellan Hill Partners advisory board and will have input into the sale. “It won’t be based on just the valuation, but on whether this is the right company to sell to,” Bono said. An acquiring company, for example, will be required to honor the evergreen clauses in the agent agreement.

Bono acknowledged that the equity play is not unique to the agent community, but says the experience of the Magellan Hill management team on both the selling and buying side of transactions should offer agents confidence that the liquidity event will happen.

Bono himself co-founded switch-based reseller Vista International Communications in 1991 and sold the company to ACC Telecom (now ACC Business) in an eight-figure all-cash buyout. He also was a co-founder of PAETEC Communications in 1998, served on its board of directors until 2006 and was part of the team that raised $130 million in private equity for the company. He also served as PAETEC’s COO responsible for sales efforts until 2005, during which time the company grew from $150,000 in revenue in 1998 to more than $500 million in 2005.

Bono reminded that when in 2006 PAETEC went public through its merger with US LEC, it also made payouts to certain agents that were issued warrants. The drawback to that program, he said, is that there were only a certain number of warrants available. He wants to make the opportunity available more widely through Magellan Hill Partners.

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