Cbeyond’s Search for ‘Strategic Alternatives’ Comes to Fruition, But Not in Sale to MegaPath

**Editor’s Note: Please click here for Channel Partners’ complete coverage of Birch’s pending acquisition of Cbeyond.**

It wasn’t MegaPath after all. It was Birch Communications.

Earlier this year, rumors swirled that cloud and network provider Cbeyond might sell to managed services provider MegaPath. Indeed, Cbeyond had stated in its most recent earnings report that it was evaluating “strategic alternatives,” including acquisitions or a sale, after reporting a $5.3 million net loss in the third quarter of 2013 and losing 20 percent of its stock value in the past year.

But, as it turns out, Birch Communications on Monday announced itself as Cbeyond’s buyer.

The deal marks Birch’s largest acquisition to date. The Atlanta-based company, which has transformed itself from a regional, legacy reseller into a national provider of business cloud, communications and managed services, will pay $323 million in cash for Cbeyond, thanks to financing from PNC Capital Markets LLC and Jefferies Finance LLC. That’s $301 million more than what Birch paid for Lightyear Network Solutions in 2013 – to that date, the largest of the publicly revealed transactions Birch had done. And, Birch said it will generate $700 million in annual revenue as a result of buying Cbeyond, which is also headquartered in Atlanta.

Cbeyond stockholders will get between $9.97 and $10 per share. The former price would represent a premium of 56.8 percent over Cbeyond’s stock price on Nov. 5, 2013, the trade date before Cbeyond said it would explore alternatives; the latter would represent a premium of 40.8 percent over the closing price of Cbeyond’s stock last Thursday, April 17, Birch said.

“After a thorough six-month strategic review process in which we evaluated a wide range of alternatives in addition to a sale, the Cbeyond board of directors determined that this all-cash transaction with Birch maximizes stockholder value through an attractive premium,” said James Geiger, founder, board chairman and CEO of Cbeyond, in a prepared statement. “We have been strengthening the Cbeyond franchise with our 2.0 transformation; the wider reach with Birch enables the combined companies to increase service levels with a broad array of products to a larger number of customers.”

For Birch, adding Cbeyond serves some key aims. First, the purchase gives Birch truly national footprint, and reach into Canada and Puerto Rico, as well as about 200,000 additional business customers. It also lets Birch serve more sizes of client, from initial startup to multilocation enterprise, rather than just SMB. Finally, the combination creates an IP network with about 10,000 fiber route miles, more than 500 fiber-lit buildings, 570 collocations and five data centers throughout the United States.

Birch did not provide details about whether it will retain all of Cbeyond’s employees, nor did it discuss in-depth its plans for the channel (or Cbeyond channel chief Zane Long or Birch channel chief Brad Smith). Christopher Ramsey, chief sales and marketing officer for Birch, said in a press release that Birch will integrate “the Cbeyond sales organization, including management, representatives, partners, dealers and support staff into the Birch sales family.”

“We are committed to making this a smooth and productive transition for all divisions of the sales organization,” he added.

Check back with Channel Partners throughout the week for more. Birch’s post-acquisition channel policies have created some controversy in recent years, as well as at least one lawsuit in which Birch has been ordered to pay damages.

Cbeyond marks Birch’s 21st acquisition since the late 1990s. Both companies’ boards of directors have approved the transaction, which should close within six months.  

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