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Competitors Still Pursuing Consolidation

Competitive telecommunications providers

still are aiming to improve the bottom line through mergers and acquisitions. With plenty of assets on the market, dealmakers once saddled by huge debt obligations have conceded the necessity of getting bigger, some executives say.

Many private companies backed by venture capitalists do not have an exit strategy to go public and find it difficult reaching the scale to generate positive cash flow and turn a profit, says Larry Williams, chairman and CEO of ITC^DeltaCom Inc. This is where consolidation comes into play.

ITC^DeltaCom, the West Point, Ga., telco targeting businesses in the Southeast, sees the opportunity to grow the company to more than $1 billion in annual revenue in the next year or two “primarily through consolidations,” Williams says.

“At that level we think we could be a very profitable … kind of business,” he says.

Last year, ITC^DeltaCom posted a net loss of $24.3 million on operating revenue of $461.6 million, but recent strategic transactions are expected to boost sales. In September, ITC^DeltaCom announced an agreement to merge with two Florida telecommunications providers, Florida Digital Network Inc. and NT Corp., the parent company of Network Telephone Corp., in stock agreements. The news came less than a year after ITC^DeltaCom announced closing the merger of BTI Telecom Corp. Upon closing the most recently announced merger, ITC^DeltaCom will serve approximately 120,000 business customers in 45 southeastern markets and support 635,000 retail voice lines.

“This deal further validates that the industry consolidation we have all been waiting for is well on its way and general health in the sector is improving,” Needham & Co. analysts wrote in a research note.

Dave Schaeffer, the president and CEO of Washington, D.C.-based Cogent Communications Group Inc., has plenty of experience dealing with mergers and acquisitions. He has embarked on a buying spree since 2001, analyzing 99 opportunities in the United States and abroad, entering 17 bids, and completing 12 acquisitions in North America and Europe. Schaeffer says the first nine deals focused on acquiring physical assets to accelerate network deployment, while the company has acquired customers and products through the most recent transactions.

“I think a lot of weak entrants have just disappeared” over the last year, Schaeffer says. Weak companies still remain, he says, but that doesn’t guarantee they are ripe targets for consolidation. Schaeffer says the management at a company may not share the same interests as the equity and debt holders because the executives’ future is often at stake under a strategic transaction. “A large part of the slowness in consolidation,” Schaeffer says, “has been management guardedly holding onto its position.”

As for Cogent - a high-speed Internet carrier to telecommunications providers and small and medium businesses - Schaeffer says the company does not need to make another acquisition. That does not mean, however, he will stop looking. “Our businesses work just fine by growing organically if we never do another acquisition. At the same time, I continue to try to be opportunistic,” he says.

Translation: Schaeffer may soon be evaluating his 100th M&A opportunity.

Links

BellSouth Corp. www.bellsouth.com
Cogent Communications Group Inc. www.cogentco.com
Florida Digital Network Inc. www.fdn.com
ITC^DeltaCom Inc. www.itcdeltacom.com
Needham & Co. www.needhamco.com
Network Telephone Corp. www.networktelephone.net


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