« EATEL to Acquire Vision Communications | Main | NTELOS Poised to Split into Two Companies »
Monday
Sep262011

JAB Wireless Acquires Illinois CLEC Essex Telcom

Fixed Wireless Internet Provider Nearing 70 Acquisitions

At JSI Capital Advisors, we constantly track the M&A activity in all communications related industries. Occasionally we come across companies that go on shopping sprees, during which their seats at the deal table never get cold. JAB Wireless is one such company, having spent $77m on sixty-seven acquisitions since it was founded in 2006. JAB recently added another deal to its tally, acquiring Illinois-based CLEC Essex Telcom in an effort to expand into a new geographic market. Financial terms of the deal were not disclosed.

JAB Wireless is a Colorado-based wireless broadband service provider, which operates under the Skybeam and Digis brands. It serves 100k subscribers in Colorado, Utah, Wyoming, Idaho and Texas and has acquired an average of 1k customers in each of its slew of small WISP purchases. Since 2005 JAB has raised near $70m in equity and debt funding from private equity firms such as ABRY Partners and Hercules Technology Growth Capital Inc. Boston-based ABRY Partners, which focuses on communications investments, holds a 21% equity stake in JAB.

The Essex Telcom acquisition represents an expansion geographically for JAB, as it enters its fourth market (Colorado/Wyoming, Utah/Idaho, Texas, and Illinois). Based in Northern Illinois, Essex offers local exchange, T1, transport, wireless broadband and DSL services to a mixed customer base of residents and small businesses. Currently Essex has active interconnection agreements with Frontier Citizens Communications of Illinois, Illinois Bell Telephone Company (AT&T subsidiary) and Verizon. Estimates of Essex’s customer based are in the mid thousands, while its annual revenue is unknown.

According to filings with the FCC, Essex Telcom will be merged with JAB’s wholly owned subsidiary Skybeam Inc.  The new entity will be named Skybeam-Essex and will operate as a subsidiary to JAB Wireless. Management has indicated that the rates, terms and conditions to Essex’s current customers will remain unchanged after the merge.

JAB touts itself as the largest fixed wireless broadband service provider in the U.S. in terms of both subscribers and revenue. Its wireless network is comprised primarily of unlicensed Motorola Canopy equipment in the last mile, with a mix of licensed and unlicensed backhaul. JAB services its customers through 750 towers that provide more than 25k square miles of wireless broadband coverage. It also offers a wireless VoIP product.

The busiest employee at JAB Wireless is without a doubt co-founder Jeff Kohler, who is responsible for mergers and acquisitions. After topping the 50 acquisition mark, Kohler commented on JAB’s aggressive growth strategy and the challenges of integrating a large amount of companies in such a short window. “It takes a lot of experience and capital to execute a plan like this, and you can’t rely only on acquisitions for growth. Organic growth must be equally as strong,” commented Kohler. 

Currently the growth strategy at JAB focuses on three components: organic growth, acquisitions of WISPs within its target markets, and increasing ARPU through bundled service offerings. Kohler’s co-founders at JAB successfully implemented a similar growth strategy in the cable television industry in the mid-1990’s. JAB ceo Jim Vaughn and coo/cfo Jack Koo started FrontierVision, a rural cable system consolidation investment, which in four years they grew into an MSO serving 700k customers. In 1999, they sold FrontierVision to Adelphia for $2.1b.

Breaking down JAB’s growth, the company estimates that 64k of its customer base was acquired through M&A, while another 36k wireless subs were gained organically over the past 60 months—a compound growth rate of 28.5%. With regards to ARPU growth, the main service JAB looks to bundle is its VoIP product. Currently its VoIP penetration is around 20% of data subs, but for new customers the sell-in rate is approaching 40%.  

From a revenue standpoint, JAB has grown from $7m in 2006 to $47m in 2010, with trailing six months annualized revenue of near $55m. Given that Essex does not report revenue, its unclear what impact JAB’s most recent purchase will have on its top line.  Using information on JAB’s past deals however, we can make some estimates. In a recent company presentation, JAB estimated that it has paid an average of 1.8x revenue and $900 per wireless Internet sub for its acquisitions over the years. With an Essex customer base of around 3k-4k subs, we can back into a price tag of $2.7m to $3.6m for Essex, with its annual revenues coming in around $2m.

The Essex deal likely represents the first of many WISP purchases on behalf of JAB Wireless in the Illinois market, as the company continues to aggressively pursue growth. JAB is by far the largest WISP in its other markets, and looks to become the dominant provider in Northern Illinois as well. After recently closing on a financing agreement that will provide it with $40m in new growth capital, JAB has ensured that it will be back at the deal table in no time.