NuVox Corp. has spent much of this year dodging direct questions about its M&A intentions. Early in 2009, telecom industry insiders said the South Carolina-based CLEC was intent on buying larger rival PAETEC. NuVox neither confirmed nor denied the reports. NuVox then was said to be eyeing a takeover of competitor One Communications. Again, executives gave standard responses about always being open to “growth opportunities.” Well, neither the PAETEC nor One scenario panned out. Instead, on Nov. 3, a much bigger one did.
Rural incumbent Windstream Corp. (WIN) on Tuesday said it is buying NuVox, a privately held CLEC, for a total of $643 million. The transaction consists of 18.7 million Windstream-issued common shares, $280 million in cash and the assumption of about $180 million of NuVox’s debt. Windstream said it will pay for NuVox with cash and credit. The Little Rock, Ark.-headquartered carrier expects annual operating and capital expense synergies to reach about $30 million. Both companies’ boards have approved the deal, which is projected to close in the first half of 2010.
This is the kind of acquisition Windstream needs. The carrier mostly has counted on landline profits since its inception 66 years ago. In the 21st century, however, home phone demand has plummeted with the advent of mobile and VoIP technologies, making wireline dependence a near-recipe for extinction. Windstream has axed hundreds of jobs as a result. And while Windstream does sell broadband and digital TV services, its coverage is limited to 16 states, and even then, mostly to residential users. Recent purchases – think D&E Communications and Lexcom – only enhanced that consumer concentration.
Now, along with companies everywhere, Windstream is suffering as customers cut costs, whether voluntarily or because of lost jobs and homes. The carrier needs a diversified strategy, and buying NuVox helps accomplish that aim.
That’s because NuVox focuses on the lucrative business-services market. Windstream traditionally does not serve that segment. As soon as the deal closes, though, Windstream will boast 90,000 business clients. Indeed, Windstream said, business and broadband sales will make up more than half of the company’s total revenue.
But an RLEC takeover of a CLEC doesn’t just bode well for Windstream. NuVox appears to need the backing of a larger, deeper-pocketed peer as incumbents and cable operators, eager to reduce reliance on consumers, barrel their way into the business services sector. Because of that, Sid Earley, NuVox’s marketing executive, told us at the recent COMPTEL show, one of competitive carriers’ biggest challenges over the next year is “to stay alive in the battle between ILECs and cable MSOs.”
CLECs face an additional threat as well, Earley said. As the battle for customers rages, bandwidth pricing erosion stands to squeeze providers’ earnings. However, consolidation helps level that trend, analysts say. The fewer the providers competing for business, the harder it is for prices to hit bottom.
For NuVox, the best way to skirt the problems of competition and bandwidth pricing compression is to merge with a bigger, more-established service provider.
“This transaction is clearly the optimal path forward for our customers, our employees, and our shareholders,” NuVox CEO Jim Akerhielm said in a prepared statement.
Investors seemed to agree. At 1:11 p.m. Eastern on Tuesday, Windstream’s stock price was up .77 percent to $9.86.