Thursday
Jan122012

Vision Purchase Complete, Helping EATEL Achieve Expansion Goals  

New Opportunities in Services and Territory for Louisiana RLEC

The sale of BV Investment Partners’ Vision Communications to Gonzales, Louisiana-based RLEC EATEL, announced in September 2011, wrapped up last week. EATEL, under president and vice chairman John D. Scanlan, looks to gain new customers, expanded service area, and a plethora of communications services from the deal. According to the BV Investment Partners press release on the deal closure, “Vision provides a comprehensive suite of residential and commercial services, including digital video, high-speed Internet, local and long distance telephone, alarm monitoring, and commercial data services.” Add this to EATEL’s extensive100%  FTTH network, FiberEdge, and EATEL appears well-poised for a competitive advantage in its new and existing Southern Louisiana service areas.

Vision and EATEL have long-standing histories in rural Louisiana, as both were founded to bring service to areas not seen as profitable by the Bell system. Vision (formerly SJI, LLC) was founded in 1945 and family-owned until 2007 when it was sold to BV Investment Partners; and EATEL, also family-owned, dates back to 1935 and “has earned a reputation as a communications pioneer.” Despite humble beginnings, both companies grew throughout the generations, continually innovated and added infrastructure—EATEL claims to have started one of the first 100% FTTH networks in the country, and both companies were early entrants in other advanced services.

When JSI Capital Advisors first reported this deal in September, we estimated a value of $11-12m. Since financial information about the deal has not been made public, our rough estimate was based on access lines. Our Phone Lines 2011 lists 10,156 access lines and 1,710 broadband lines for Vision and 28,854 access lines and 11,542 broadband lines for EATEL in 2010. The deal appears to add a nice-sized chunk of access lines to EATEL’s holdings, but JSI Capital Advisors also noted that Vision experienced an unusually high annual line loss of 9% (The Deal Advisor: EATEL to Acquire Vision Communications).

Given rampant line loss throughout the market, it is unlikely that any RLEC deal is going to be based solely on adding new telephone subscribers, so the purchase of Vision presumably is providing a strategic advantage for EATEL. It appears as though the deal will add new services and territory as well as potential opportunities for future growth for EATEL. The service areas, although not directly adjacent, are relatively comparable in size and both located in Southern Louisiana. Although rural, the respective service areas are also close to Baton Rouge (EATEL’s) and New Orleans (Vision’s). One can make the argument that an RLEC located in close proximity to an urban/suburban hub is fairly attractive in terms of opportunities for population growth and new business.

EATEL also appears to be experiencing a “just go for it” moment as Vision is not their only expansion project right now. EATEL’s website shares one of the company’s key objectives: “Grow the customer base and market area through planned expansion by market segment and by geography.” The Vision deal may help EATEL achieve the geography component, but EATEL is hoping to edge into the 4G wireless market through a partnership with LightSquared.

Following in its footsteps of being one of the first 100% FTTH providers, EATEL was also the first RLEC to partner with LightSquared. According to LightSquared’s press release announcing the partnership on November 28, “This agreement will allow EATEL, an Incumbent Local Exchange Carrier, to provide its customers with a world-class broadband service that competes on price and quality with any wireless carrier in the nation.” EATEL ceo Arthur “Smokey” Scanlan commented that “LightSquared’s unique ability to offer both broadband and satellite connectivity over the same device will be a breakthrough product for our customers.” Of course, approval for LightSquared’s extensive 4G service is pending approval, but this has not stopped multiple carriers of all shapes and sizes from entering partnerships with the wholesale 4G/satellite provider whose mission is “to revolutionize the U.S. wireless industry.”

LightSquared uncertainty aside, EATEL appears to be determined to forge ahead in achieving its growth objectives in both service territory and market segments. Coming at the end of a year with only 6 ILEC deals, the EATEL-Vision deal may prove to be a sign of a turn-around in this market as companies begin to have some closure regarding regulatory issues and realize that it will take more than simply keeping the lights on to be attractive to potential buyers.

Wednesday
Jan112012

Granite State Acquires Cocci Computer Services

Expands Service Offerings and Gains Statewide Presence

Weare, N.H.-based Granite State Communications (GSC) announced on December 28, 2011 it has completed its acquisition of Hooksett, N.H.-based Cocci Computer Services, a computer networking and hardware solutions company.  Financial terms of the deal were not disclosed.

Over the last few years, I’ve often written about the public ILECs and their search for new revenue streams. Business services, data centers and cloud computing are just a few of the various new services some ILECs are providing as a way to offset the decline of the traditional telephone business.   With some experts predicting the public switched telephone network (PSTN) will be gone by 2018 as Americans are increasingly cutting the cord in favor of wireless and IP-based voice services, ILECs no longer have time to take a “wait and see” approach.  And with its acquisition of Cocci, GSC has taken a proactive approach to the future.

GSC today is the result of the merger of what were once four separate telephone companies: Chester Telephone Company, Sandown Telephone Company, Weare Telephone Company and Triangle Telephone Company.  Company origins go back to 1877 in Chester, N.H. when the state legislature granted a charter to what was then known as the Chester and Derry Telegraph Company.  GSC provides telephone and Internet services to 9,000 customers in seven N.H. communities, and has recently been deploying fiber optic cable in portions of its service area.  But, access lines have fallen at a compound annual rate of approximately 6% over the last two years. And while the rate of losses slowed considerably in 2010 compared to 2009, it’s unlikely that growth in broadband revenue will both offset declining access line revenue and provide long-term sustainable growth.

Cocci has been providing computer networking solutions to small and mid-sized businesses statewide for more than 28 years.  The Company offers a range of services including network installation and security, server and desktop monitoring, and offsite data backup and disaster recovery, with plans to introduce additional cloud services and mobility solutions in the near term.  “These services fit perfectly into the long-range planning for Granite State Communications as we work to increase our customer base and expand our list of products available to the public,” says GSC president Susan Rand King.

By acquiring Cocci, GSC has gained a new list of services it can offer to its existing customers. But perhaps more importantly, GSC, through Cocci, now has a statewide presence where before it was limited to its seven community service area. This acquisition certainly provides GSC with a platform for growth, and it now comes down to execution.

Wednesday
Jan112012

zColo Pays $15.9m for Las Vegas Data Center

Zayo Group Expands West Coast Presence

zColo, a Zayo Group Company, announced on January 3rd that is has acquired all of the net assets of MarquisNet, a Las Vegas-based co-location provider. According to documents filed with the SEC, zColo will pay approximately $15.9m in the deal, subject to post-closing adjustments. The purchase was funded through Zayo’s revolving line of credit, which prior to the deal was $63.3m. MarquisNet represents Zayo’s 18th acquisition since its inception in 2006.

The primary asset in zColo’s purchase is MarquisNet’s data center, located at 7185 Pollock Drive in Las Vegas. The facility features 28k square feet of co-location space, Tier 1 Internet access, N+1 routing equipment and HVAC redundant design.  Including this newly acquired facility, zColo owns and operates 12 data centers in 11 markets including Los Angeles, New York and New Jersey. Zayo Group, zColo’s parent company, has indicated that it will extend its fiber network to 7185 Pollock Drive, joining AT&T, XO, Cox Communications and Sprint among the nine carriers that have a fiber connection to the facility. 

The acquisition of MarquisNet and the forthcoming fiber build into the Las Vegas facility furthers Zayo’s efforts to expand its presence out West. In December, Zayo closed on its $393m purchase of 360networks, which provided it with access to a number of new markets on the West Coast including Albuquerque, San Francisco and Tucson. It also recently completed a fiber build into the Green House Data Center in Wyoming, providing the facility with metro and long haul connectivity, and it is in the middle of a fiber network build in San Diego.

zColo commented in its press release announcing the MarquisNet purchase that among its enterprise clients there has been a surge in demand for data centers as a location for disaster recovery on the West Coast.  Las Vegas in particular is a popular destination for data center owners to build and operate thanks to its cheap land, and relative lack of natural disasters. Data center specialist Switch operates multiple properties in Las Vegas including its flagship 400k square foot SuperNap facility and it will soon break ground on a $400m project to add 600k square feet of data center space in Las Vegas.  Both Zayo and Switch attribute the increase in data center demand at least in part to the increase in cloud computing.

At a price of $15.9m, zColo paid approximately $568 per operating square foot for MarquisNet, a multiple below the average price of $751 per square foot observed in recent transactions. We have no past financial information on MarquisNet, however recent data center deals have been struck at an average of 5.7x revenue which would indicate the facility could add around $2m-$3m to zColo’s top line. Based on its 3Q11 financials annualized, zColo currently generates approximately $39m in revenue annually.  

Monday
Jan092012

Birch Continues “Tuck-In” Acquisition Strategy in Florida

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. 

Sunday
Jan082012

2011 ILEC Deals Few and Far Between: Has the Ship Sailed? 

Will a Little Regulatory Certainty Kick-start this Tepid Market in 2012?

Despite fervent deal activity in most telecom sectors in 2011, ILEC deals were incredibly slim. Sixteen deals were announced in 2010, but JSI Capital Advisors only tracked 6 new deals in 2011—plus one more that didn’t quite make it to the finish line. Although there could be a variety of reasons why ILEC deals were so few and far between in 2011, the single most likely culprit is regulatory uncertainty surrounding USF and ICC. The question is:  did small ILECs miss the boat on a good deal before USF/ICC took a dark turn, or will there be a revitalization of ILEC deals once the fog clears and companies (hopefully) have a somewhat brighter future?

Of the 6 small ILEC deals in 2011, less than half were RLECs buying other RLECs, one involved an RLEC buying a telecom utility, and two involved investment firms on one side or another:

 

2011 was not the first year for a decrease in ILEC deals, but definitely the first year for such a steep decline- JSI Capital Advisors reported 16 deals in 2010, 18 deals in 2009, 19 in 2008 and 20 in 2007 (The Deal Advisor: ILEC Sales Closing in 2010 Approach $10b). Many of you may remember “The Great Dallas Debate” at the 2011 NTCA annual meeting where National Broadband Plan director and Aspen Institute fellow Blair Levin faced off against RLEC duo Randy Houdek (Venture Communications Cooperative) and Delbert Wilson (Hill County Telephone Cooperative). This debate became notorious for a lot of things, but Levin did make one point that even the most dedicated RLEC advocate would have a hard time denying—the “deal” that the rural industry could have gotten with USF/ICC reform a few years ago would have been relatively better than the deal they got in 2011, and the deal we ended up with in 2011 is probably better than the one we would get in the future. Can the same logic be applied to ILEC mergers and acquisitions?

If so, can we expect less than 6 small ILEC deals in 2012? It may depend on how the USF/ICC changes impact the value of these companies. Even though the sheer fact that USF/ICC reform has technically been achieved (assuming the pending appeals cases don’t change anything significantly), it sure doesn’t seem like there is a whole lot of “regulatory certainty”—at least not the level of certainty that could help increase valuations and make RLECs attractive to buyers as they were back in the day. An industry that was once considered safe, profitable and solid as a rock is starting to look like anything but when you factor in the regression analysis-induced “race to the middle,” reduced access revenue, declining landline connections and myriad competitive forces.

A couple of 2011 deals, like La Motte Telephone purchasing Andrew Telephone (both in Iowa) and Otelco acquiring Vermont-based Shoreham Telephone Company were fairly straightforward examples of convenient deals that would boost the buyer’s footprint and create various operating and strategic synergies. Interestingly the Otelco-Shoreham deal reflects the issue mentioned above—that RLECs have possibly missed the boat on a good deal—as Shoreham was reportedly offered three times more from a prospective buyer in 2003 than what Otelco offered in 2011 (The Deal Advisor: Otelco to Acquire Shoreham Telephone for $4.5m).

Also interesting is that the FCC has made no effort to hide its desires that small RLECs merge—consolidated switching is strongly recommended in the ICC section of the Order. The FCC may not have considered that its very own actions on USF/ICC are prohibiting a vibrant market for high-value small rural telephone company deals, but there are more factors to consider than just regulatory uncertainty. The almost-merger between small Minnesota RLECs Farmers Mutual Telephone Company and Federated Telephone Company illustrates this point quite effectively. It was the members of one of the cooperatives who killed a deal that (on paper at least) appeared to be a perfect match (The Deal Advisor: Farmers Mutual Fails to Approve Merger with Federated Tel.).

Is there any optimism for an upswing in ILEC deals in 2012? If prospective buyers are willing to accept the regulatory risks and if ILECs can figure out how to build value in this environment, then it is certainly possible. But will we look back at the 6 deals of 2011 as an unusually low outlier simply because of the year’s heightened regulatory uncertainty, or are single-digit deals the new norm?