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Birch to Acquire Cordia Communications for $8m

Bankruptcy Lowers Deal Price to 0.1x Revenue

On May 2, 2011, Cordia Communications filed for Chapter 11 bankruptcy protection, and company management announced its intent to sell its CLEC assets--nearly 56,000 residential, business and broadband access lines scattered over 24 states.  While Cordia expected multiple bids, only one was received: Birch Communications’ $8m offer was approved by a Florida bankruptcy judge on July 18, with the deal set to close in 4Q11. The Florida-based Cordia offers traditional wireline local and long distance phone, and also generates significant revenue from VoIP services.

Birch’s acquisition of the financially troubled company is not surprising, given its own familiarity with the bankruptcy process.  Birch was founded in 1997 as a local and long distance reseller and five years later declared bankruptcy—its first of two trips to Chapter 11.  The company emerged from bankruptcy later in 2002, only to make a second visit in 2005. In 2006 Birch exited bankruptcy for good, and was purchased by Atlanta-based Access Integrated Networks (AIN) in 2008.  AIN subsequently took the Birch Communications name.

The make up of Birch today is much different than that of the telco of 1997.  It still offers local and long distance phone services, but now provides managed communications and IT services for small and medium-sized businesses.  Birch has grown revenue 152% from $65m in 2006 to $165.4m in 2009. Given its aggresive acquisition strategy over the past year, recent revenue estimates of $200m in 2010 are within reason. 

Birch has been on a spending spree of late, making purchases as part of its “tuck-in” acquisition strategy.  The strategy targets properties that can serve two purposes: generate immediate revenue, and expand its network, which now extends across 38 states. The Cordia deal is Birch’s fourth acquisition since Sept 2010, and by far the largest.  Its three other buys—American Fiber Network, Freedom Communications USD, and CloseCall America—added a combined 60k access lines compared to Cordia’s 56k. 

While Cordia was the largest of Birch’s recent acquisitions—given that bankruptcy deals generally translate into fire sales, it was most likely  the cheapest as well. Let’s take a look at the deal's numbers.

Cordia may have entered Chapter 11 on May 1, but its financial woes were evident long before then.  A glance at its past financial statements show that its current liabilities have been double the amount of its total assets since early 2009, and the company has been operating at a loss since 2007.

Annual revenue for Cordia however was sizable at $60.6m in 2010. With a purchase price of $8m, the deal was done at a sharply discounted 0.13x revenue multiple--indicative of Cordia’s financial distress. For a comparative deal, I had to look back to October 2010, when Lightyear Network Solutions acquired the bankrupt-CLEC SouthEast Telephone, Inc. That deal’s multiple of 0.2x was consistent with what Birch paid. Though details of Birch’s other recent purchases are undisclosed, we can safely assume that it paid higher multiples.

Despite Cordia’s historical financial struggles, the purchase will grow Birch’s top line to over $250m annually. Birch is confident that its team can leverage past experiences and seamlessly transition Cordia into its operations. "We've gotten very good at integrating new customer bases into our systems and not increasing our costs," Greg Corwin, Birch Communications’ spokesman stated. "We run a tight ship."

I suppose emerging from Chapter 11 is just like anything else, practice makes perfect. 

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