Georgia-based CLEC Acquires Operating Assets from AstroTel

Atlanta, Georgia-based CLEC and managed services provider Birch Communications announced on January 3rd that it has signed a definitive agreement to purchase the operating assets of AstroTel, a Sarasota, Florida-based CLEC. Through the deal, Birch will acquire AstroTel’s IP-based network that spans multiple cities along Florida’s West Coast.

Birch kicks off the New Year utilizing a growth strategy that it has stuck with for the past five years: using M&A to expand its private, IP-based network and to extend the reach of its services. Birch offers IP-based communications services in 38 states and has implemented a “tuck-in” acquisition strategy through which it targets properties that will expand its IP network near its current footprint and increase customer density in its existing markets.

While Birch’s roots are as a local telephone provider and long distance reseller, the company has since moved into managed communications and IT services, which it delivers to small and medium-sized business customers over its private IP network. Since 1997, Birch has grown its client base from 100 customers to over 100k customers, primarily through acquisitions.

The AstroTel deal represents Birch’s 14th acquisition since 2006, and its second Florida-based purchase in recent memory. In October 2011, Birch closed on a deal to acquire the assets of Orlando-based CLEC Cordia Communications for $8m.

A home state is not the only characteristic that Cordia and AstroTel share. AstroTel, like Cordia at the time of its acquisition, has been operating under Chapter 11 for the past year. It filed for bankruptcy protection in early-2011, reporting only $325k in assets and $675k in debts. AstroTel’s Chapter 11 filing coincided with an antitrust lawsuit that the CLEC brought against Verizon, in which it claimed anticompetitive actions on behalf of Verizon that included illegal cross-subsidizing of unregulated Internet services and intentional impairment of services to AstroTel subscribers. AstroTel’s lawsuit against Verizon is still pending.

While financial terms of the deal have not been disclosed, based on AstroTel’s distressed financial position, Birch likely picked up AstroTel’s assets at a discount. Over the past few years, the CLEC deals we have observed involving companies in Chapter 11—including Birch’s purchase of Cordia—have carried an average price tag of 0.2x revenue. According to its bankruptcy filings, AstroTel generated approximately $1m in revenue during 2009 and 2010.

While the AstroTel purchase marks Birch’s first deal of the year, odds are that it will be the first of many deals for the company in 2012. In June, Birch secured $77.5m in debt financing to help fund future acquisitions and network development.