Covad, MegaPath Merge, Will Focus on Managed Services

Privately held Covad Communications Co. and MegaPath Inc. said on Wednesday they’re merging, a move that signals ongoing consolidation in the competitive provider community.

A number of analysts and telecom industry insiders have said such M&A needs to keep happening among CLECs. That’s because, together, smaller carriers form formidable rivals to rural LECs, the Baby Bells and IP companies that are honing in on CLECs’ traditional business customer base.

To that point, Covad and MegaPath are banking on their managed services approach appealing to SMBs, enterprises and wholesale users. Together, the companies will sell Ethernet, DSL and T1 access, as well as managed IP data, voice and security services throughout North America.

“By leveraging the strengths of each company, we will provide customers and partners with expanded expertise, broader innovative services and a powerful network that simplifies the way they communicate and conduct business online,” said Craig Young, MegaPath’s CEO and the new executive chairman of the combined company, in a prepared statement.

Covad CEO Pat Bennett will stay in that role.

Covad and MegaPath did not disclose the terms of the deal, since they’re both owned by private investors. The transaction is expected to close in the third quarter once all regulatory approvals are granted.

Covad is owned by Platinum Equity, a Beverly Hills, Calif.-based investment firm that has snapped up several struggling telecom properties in the past few years. For example, Platinum Equity also runs Trinsic, the former Z-Tel, Startec GlobalCommunications, Matrix Telecom, DCA Services and Americatel. Platinum Equity announced its intent to buy Covad in October 2007 for $304 million; the acquisition was finalized in April 2008.

Merging Covad and MegaPath makes sense on paper. More details have yet to come, but MegaPath raked in $151 million in revenue in 2008, according to Inc. Magazine; the publication ranked MegaPath as No. 1,446 on its Inc. 5,000 last year. Meanwhile, Covad reaches more than 4,400 central offices and MegaPath claims more than 19,000 direct SMB and enterprise customers.

Covad’s wholesale partners include AT&T Inc., Verizon Business and Sprint Nextel Corp.

Both Covad and MegaPath entered the telecom market with an eye on residential users, a business model that quickly proved unfeasible. Now they’re counting on next-gen services, sold through direct and channel sales forces, to catapult them to the top of the managed services heap. And if statistics hold up, Covad and MegaPath are on the right track. In just the SMB world alone, about 30 percent of companies plan to implement managed services this year, according to a January report from the Computing Technology Industry Association.

The combined company, whose name has not been announced, will be owned by Platinum Equity and MegaPath investors. It’s unclear which services and equipment will be kept intact after the deal closes and which will be shut down. In a prepared statement, Johnny Lopez, a Platinum Equity partner, only had this to say: “Partners and customers will quickly see new services and capabilities that provide them even greater value, while the company realizes improved efficiencies and greater profitability, and enhanced opportunities for growth through acquisition.”

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