Covad Goes Private

An ongoing lack of profitability and problems provisioning its hosted VoIP services are two likely reasons Covad Communications Group has agreed to be bought by Platinum Equity, a private equity firm, analysts say.

The companies said on Oct. 29, Platinum Equity will pay $1.02 per share, or approximately $304 million in cash, for Covad; the terms represented a 59 percent premium on Covads share prices at the end of the previous week. Covads board unanimously approved the transaction, which still must get approval from shareholders and the FCC. The deal is expected to close in the second quarter of 2008.

Charles Hoffman, Covads president and CEO, said Platinum Equity will help Covad with its business strategy. We believe that the resulting increased market competitiveness, improved capital structure, and enhanced product and network capabilities best position our customers, partners and employees for the future, he said in a news release.

Industry experts arent quite certain why Covad is going private now. To be sure, Covad hasnt reported a profit for five years, says Norm Bogen, a director and analyst for research firm In-Stat. However, Covads revenue has grown slightly since 2002 and the company has managed to trim its losses. It looks like everythings going in the right direction financially, Bogen says.

But Wall Street is an unrelenting mistress. The costs of being public often overwhelm companies and low stock prices dont inspire investor confidence. In the last year, Covads shares have topped out at $1.54 and sunk to 60 cents. At press time, its stocks were trading for 91 cents.

Indeed, Covad has been limited in its ability to make the investments required to improve the network, add new products and services, and acquire new customers and partners, says spokesman Michael Doherty. Covad believes it has additional growth and profit potential with the improved capital structure made possible by the acquisition.

One of the reasons for the poor financial performance could be the problems Covad has had rolling out hosted VoIP. Hosteds been killing Covad, says one industry insider who hopes to try again to buy Covads hosted VoIP unit. His company made an unsuccessful bid earlier this fall. Its a complicated product.

He says Covad took on too many customers all at once and now provisioning is suffering. Truck rolls, he adds, are numerous.

Doherty didnt directly address Covads problems with VoIP. He only says the product remains a key driver for the company. Customers and partners can expect to receive the same great service, Doherty says.

Now the question is, what will Platinum Equity do with Covad? Bogen says private equity firms often buy one company and merge it with another to create more value for themselves. Another strategy is to buy a company, split it into pieces and sell the parts that dont create income. A private equity firm is not going to stand for losing money every year, Bogen says.

Platinum Equity has purchased several telecom companies over the past few years, garnering mixed reviews within the indirect channel. The firm earlier this year bought Trinsic Inc., the former Z-Tel, and has yet to pay a number of agents on outstanding commissions. Platinum Equity also owns Matrix Telecom, Startec Global Communications and Americatel Corp.

Several channel partners polled by PHONE+ said they were unconcerned about Platinum Equity taking over Covad.

Covad Communications Group
Platinum Equity

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