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Business News – Smarter Telcos Getting Smart Money

Posted: 06/2001

Business News

Smarter Telcos Getting Smart Money
By Josh Long

Despite layoffs, declines in margins, bankruptcies and other morbid news, telecommunications investors are not dormant–at least not when it comes to funding smart carriers that see opportunities in markets below the Tier 1 level.

Even as telecom executives winced at the sight of poor earnings in the first quarter, some carriers in local exchanges and wholesale markets are raising hundreds of millions of dollars in new capital. This offers hope to others that money will be available for those who meet rigorous new criteria set by cautious investors.

Setting the pace were BTI Telecom

Corp. (www.btitele.com), CityNet
Telecommuniations Inc. (www.citynettelecom.com), Dominion Telecom (www.dominiontel.com), New Edge Networks Inc. (www.newedgenetworks.com), Net2000 Communications Inc. (www.net2000.com) and PointOne Telecom-munications Inc. (www.point-one.net).

Executives at these companies attribute their financing successes to several key factors, including sound management teams, balanced financial sheets, strong backing through affiliate companies such as utilities, demand for broadband services in underserved markets, and an ability to follow through with a business plan and innovation.

From the investor perspective, John Patton, managing director of communications services at MCG Capital Corp. (www.mcgcapital.com), says their evaluation parameters center on the cost of acquiring a customer, churn rates, gross profit margins and the type of customer a company is servicing.

“I think what we are looking for are companies that have demonstrated an ability to significantly grow the business, while at the same time effectively managing the business within financial targets,” Patton says.

In April, BTI Telecom, a facilities-based company that sells integrated services to small and medium-sized businesses as well as fiber and bandwidth services to carriers in the Southeast, announced that it closed a $90 million financing commitment from Welsh, Carson, Anderson & Stowe (www.welshcarson.com). The
financing consists of $40 million in equity financing and $50 million in debt.

Since 1983, BTI Telecom has demonstrated a track record of executing on its business plan, says Tony Copeland, BTI Telecom general counsel and executive vice president. As planned, BTI Telecom has installed its local, long distance, frame relay and ATM switches, developed a fiber optic network in the Southeast, and now is focused on obtaining further market share.

In late March, BTI announced that it completed construction of its 506-mile long-haul network from Raleigh N.C., to Savanna, Ga., marking the completion of its planned 4,300-mile fiber network. Executives say the company manages many channels of distribution to market its integrated services. One of its sales teams, for instance, targets colleges and universities.

“When you are looking for financing, a good story doesn’t cut it anymore,” says Ed Czarnecki, managing director of BIA Ventures Corp., at Chantilly, Va.-based BIA Financial Network (www.bia.com). “It gets down to sales. It gets down to the ability to follow through.”

A good story might not be enough to ice the deal, but it still helps. CityNet Telecom-munications raised $275 million in equity and debt financing in April to finance development of its last-mile broadband network. The company uses robots to incorporate fiber through public sewers, a strategy that many telecom analysts have touted for several reasons (see
“CityNet Telecommunications Raises $275
Million"
).

Even service providers that have modified ambitious plans under financial pressure have demonstrated they can access capital, if their revised strategies make sense to investors.

New Edge Networks, a national broadband access provider that raised $77.5 million in private equity and debt financing in a recent funding round, announced last fall that it would scale back its nationwide plans to introduce DSL services. But its strategy to provide a more diverse portfolio of data services over its national ATM network has pleased investors, says New Edge executive director of communications and investor relations Sal Cinquegrani. The company focused this winter on providing businesses WAN services such as frame relay and ATM (the strategy, however, did result in 55 announced job cuts).

“We are diversifying revenue streams, which becomes an appealing reason for companies to invest in New Edge,” Cinquegrani says.

A spokeswoman representing Net2000 Communications, which closed $190 million in financing in April, attributed the company’s new funding round to a seasoned management team. For example, Net2000 chairman and CEO Charlie Thomas worked at IBM Corp. (www.ibm.com) and the former Bell Atlantic in sales and marketing positions for many years. Other executives have been in leadership positions at companies such as LCI International Inc., MCI Telecommunications and Qwest
Communications International Inc. (www.qwest.com), says Gerry Simone, senior vice president and chief communications officer of Net2000 (MCI merged with WorldCom Inc.
[www.worldcom.com], and Qwest purchased LCI).

“A management team is something more and more people are looking at,” Simone says. “I think that was one of the reasons [investors] felt they could take a leap of faith. Charlie has brought in more and more people that have a real depth of experience.”

One firm that hopes to benefit from the ongoing investment stream is Tulsa, Okla.-based AFN Communications (www.afncommunications.com), which expects to raise $300 million in funding by the end of the second quarter. The company must show lenders for what the money is going to be used and demonstrate that the funding will let AFN reach cash flow positive, says David Cordeiro, AFN vice president of strategic planning and communications.

AFN executives believe the company is in good shape financially because it carries little debt compared to other broadband providers, other than the money its affiliated corporate stakeholders dole out to fund operating expenses. AFN also has swapped equity with these affiliates for fiber throughout the nation, which has lowered costs of infrastructure development, executives say.

Six energy and telecom companies formed AFN in March 2000. The companies included the communications subsidiaries of Allegheny Energy Inc. (www.alleghenyenergy.com), American Electric Power (www.aep.com), FirstEnergy Corp. (www.firstenergycorp.com), GPU Inc. (www.gpu.com), and ILECs CFW Communications Co. and R&B Communications Inc. CFW and R&B now are part of NTELOS Inc. (www.ntelos.com); FirstEnergy and GPU also announced separate merger agreements that are currently under regulatory review, according to AFN.

Cordeiro declined to reveal AFN’s operating expenses, but the company is confident plenty of business is waiting for the delivery of services to underserved markets in the Northeast, according to AFN president and CEO Gordon Martin.

“We are an enabler to ASCENT [Association of
Communications Enterprises, www.ascent.org] members in delivering services into a large number of markets,” Martin says, referring to the diverse group of resellers that comprises the association. “And that is really relevant because one of the issues the industry has to deal with is the large amount of competition in Tier 1 cities and the fact that a number of Tier 2 and Tier 3 markets really haven’t been touched.”

Adds Cordeiro, “You really can get financed in the second- and third-tier space. [But] it often takes a lot longer than it might have a couple of years ago.”

Despite the unrelenting tremors in the telecom sector, analysts are confident that many companies can earn their keep in the broadband market.

“Those companies with agile management teams and a

n aggressive sales force and rock-solid technology will be

the ones to capitalize on those opportunities,” BIA’s Czarnecki says.

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