CLEC M&A FEVER is spreading from coast to coast.
In the span of one day, four major CLECs announced unions worth millions of dollars. Integra Telecom Inc. declared its $566 million acquisition of Eschelon Telecom Inc. on March 20, while NuVox Communications and FDN Communications disclosed their merger, minus the financial terms, on March 21. The Integra Telecom-Eschelon deal is expected to close in the third quarter. The NuVox-FDN matchup should close in June.
The Integra Telecom-Eschelon alliance creates one of the largest CLECs in the United States, says Current Analysis senior analyst David Hold. The provider which will use the Integra Telecom name trails market leaders XO Communications, PAETEC Communications Inc. and Time Warner Telecom. The transaction also means the combined company will be the biggest Western regional CLEC, covering 11 states from Minnesota to Arizona, Hold says.
|Top Post-Merger CLECs||
|XO Communications||$1.41 billion|
|PAETEC/US LEC||$1.01 billion|
|Time Warner Telecom/Xspedius||$812.4 million|
|One Communications||(privately held) $800 million|
|Eschelon/Integra||(privately held) $518.5 million
(without revenue from one 2006 acquisition)
|Broadview Networks/ InfoHighway||(privately held) $500 million|
|NuVox/FDN||(privately held) $500 million|
|TelePacific Communications||(privately held) $406 million
(after Mpower Communications acquisition)
|Level 3 CLEC revenue||$273 million|
Source: Company filings and interviews
The research firm took a slightly positive stance on the merger for a couple of reasons. For one, Integra Telecom gains 514,000 lines reaching 60,000 subscribers in nine states. For another, both Integra Telecom and Eschelon focus on similar territories. The merger strengthens Integra Telecoms presence in the Pacific Northwest while adding a new footprint in Colorado and parts of California, says Hold.
Integra Telecom is based in Portland, Ore., and serves businesses throughout the Pacific Northwest and Intermountain West. Eschelon is headquartered in Minneapolis, but, through a series of acquisitions, also covers a number of Western territories. Both carriers are formidable competitors to Qwest Communications International Inc. Integra Telecom is privately held so, as a result, Eschelon will stop trading on the Nasdaq once the merger is completed.
Eschelon has purchased five companies since 2005 and, in a March 20 conference call with managers, addressed why it didnt buy Integra Telecom.
We attempted to do that over the last several years, but our pricing fell short of what their investors would accept and they stepped up to provide Eschelon with a good price that was acceptable to management and our board, said Rick Smith, president and CEO of Eschelon, who will join Integra Telecoms board of directors.
|Dudley Slater, Integra Telecoms CEO, has said the combined Integra- Eschelon headquarters will be in Portland, Ore., home to Integra Telecoms current headquarters.|
|Eschelons Rick Smith will join Integra Telecoms board of directors after the companies merger closes.|
|NuVox CEO Jim Akerhielm will keep that title once the provider merges with FDN.|
|FDNs Mike Gallagher will become president of strategic markets for the new NuVox.|
He emphasized Eschelon was not for sale, nor was it actively seeking buyers. But, he added, Integra Telecom presented a compelling price that after much analysis and debate, was deemed to be acceptable to our board.
Integra Telecom CEO Dudley Slater has said the consolidated headquarters will be in Portland, although a regional center will stay in Minneapolis. Dont assume all functions will be moved to Portland, because they will not be, Smith told employees. [T]hey will generally exist where the best processes and people exist.
Smith has instructed Eschelons managers to keep selling the companys services, even to Integra Telecoms customers, and to try to keep clients from moving to Integra Telecom.
Integra wont go into detail, but executives say they believe strongly in the agent channel and value its contributions to the company. The contract with Eschelon lets agents serve a range of customers, from small businesses needing POTS lines and DSL to large enterprises demanding high-bandwidth services, the company says.
The deal is being financed through a senior credit facility arranged by Deutsche Bank Securities. It still needs approval from Eschelons shareholders, alongside the typical conditions and regulatory approvals.
Meanwhile, NuVox Communications and FDN Communications say theyre merging to share more than 90,000 customers, and 1 million voice and data lines. The new company will keep the NuVox name.
Both CLECs are privately held and say their combined annual revenue will surpass $500 million. Thats about the same as two other recently merged East Coast providers, Broadview Networks and InfoHighway Communications. Because of the lack of financial specifics, Standard & Poors analysts are unsure how to view the union. It is not clear whether the outcome of the transaction will be detrimental or beneficial to NuVoxs overall credit profile, says credit analyst Catherine Cosentino.
Executives have faith, however. NuVox and FDN target the same customers and have overlapping markets, so a combination makes excellent strategic sense, says NuVox CEO Jim Akerhielm. Akerhielm will keep that position once the deal closes.
FDNs CEO, Mike Gallagher who will become president of strategic markets for NuVox says merging with NuVox also gives the providers access to more capital to keep growing. Once a company reaches a market cap of about $1 billion, youre more investment-grade, he says. At some point, he adds, the new NuVox could go public because of its size.
NuVox will go head-to-head with PAETEC/ US LEC and make substantial inroads in Florida and Georgia, thanks to the FDN acquisition. Commissions and operations will be business as usual for partners, Gallagher says. In fact, the new NuVox only will rely on agents more. Its hard selling out there, he says. We need every bit of distribution that we can get. We value [partners] and we absolutely need their help.
Products and services will remain IPfocused and include private networking, Web hosting and data connectivity and storage for business customers. NuVox will keep its headquarters in Greenville, S.C. FDN operates out of Maitland, Fla., and NuVox will maintain sales, customer and technical personnel in both Greenville and Maitland.
The new NuVoxs board of directors will consist of David Solomon as chairman of the board; Akerhielm and Gallagher; Jim Wade and Gillis Cashman of MC Venture Partners; James H. (Jamie) Greene Jr. of Kohlberg Kravis Roberts and Co.; Scott Perper of Wachovia Capital Partners; and Jim Fleming of Columbia Capital Partners.
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