Windjammer Deals Again, Caps Off a Busy 2011

Kansas-based MSO Deals Rural Cable Systems to Montana ISP

MontanaSky West LLC, a Montana-based CLEC and Internet service provider, announced last week that it had acquired a pair of cable systems from Kansas-based Windjammer Cable, in a transaction that closed on December 19th. In the deal, MontanaSky picked up the Libby and Troy cable systems in Western Montana and approximately 1,400 customers from the deal-happy Windjammer. Financial terms of the acquisition were not disclosed.

The sale is a fitting way to close out what was a busy year for Windjammer, having closed on a pair of deals earlier in the year.  The rural MSO sold systems in Georgia and Alabama to Charter in March, and later jettisoned its Evanston, Wyoming system to All West Communications in late-September. The company apparently decided to stay out west after the Wyoming system deal, and found an eager buyer for its Montana cable assets in MontanaSky West.

Headquartered in Kalispell—which is right next door to Libby and Troy—MontanaSky serves approximately 10,000 customers with a variety of communications services. It provides wireless broadband Internet from its two towers in Kalispell, retails both DirecTV and Dish Network satellite services, and offers a variety of business services including website hosting and server virtualization utilizing its two data centers.

MontanaSky had been actively planning to build fiber out to Libby and Troy prior to acquiring Windjammer’s cable systems.  Earlier this year, the company announced on its website that it was building middle mile fiber to the towns, hoping to land a $4m RUS loan from the USDA to fund the project.  While it has not yet been awarded the loan, MontanaSky founder Frederick Weber has reinforced that improving Internet service in Libby and Troy is still his top priority after acquiring the cable systems from Windjammer.

“The first thing we do (after the Windjammer acquisition) is finish the long awaited fiber-optic line to Kalispell from Libby, which will supply us with an unlimited supply of bandwidth, which will stop the periods of internet slow downs during peak periods and increase speeds to way over those available now or those speeds over phone line DSL.”

Also on the top of Weber’s to do list: get telephone service up and running in its newly acquired service areas. According to the company’s press release, MontanaSky is engineering its cable plant to deliver voice service to customers in Libby and Troy. Frontier currently offers the only voice service in the region. 

Using Windjammer’s past priced transactions and recent observed cable multiples as a proxy, we can estimate the price tag for the two cable systems. Charter shelled out $2,500 per sub to Windjammer for its Georgia and Alabama systems earlier this year, while cable deals in 2011 have been done at an average per sub multiple of $2,286. Using a range of $2,286-$2,500 per sub, we can estimate a price of $3.2m to $3.5m paid by MontanaSky. If these estimates are in the ballpark, Windjammer is most likely taking a loss on the deal. The cableco paid just under $3,000 per sub to Time Warner for all of its cable systems back in 2008.


Telcos Take to the Cloud in 2011

Data Centers and Cloud Providers Targeted Early and Often in 2011

While there were only a handful of ILEC deals to speak of in 2011, telcos of all shapes and sizes kept The Deal Advisor busy this year with ventures into data centers and cloud services. Over the past twelve months, many telcos joined a diverse group of companies ranging from Best Buy to VoIP providers to cablecos that made acquisitions in the data center and managed services space. In the deals we observed, communications providers shelled out nearly $8.2b at an average price tag of nearly 5x revenue to get a piece of these growing industries.

A trio of large publicly-traded ILECs made the biggest splashes into the data center arena in 2011, spending nearly $7.5b to acquire 3.5m square feet of data center space. Verizon got the action started with its $1.9b purchase of Terremark and its 13 data centers in January. Shortly after Verizon closed on its deal, CenturyLink picked up industry giant Savvis for $3.2b in what was the year’s largest data center deal. With the Savvis purchase under its belt, CenturyLink immediately became one of the largest data center operators in the U.S. with 48 facilities totalling 1.9m square feet. Not to be out done, Windstream announced on August 1st that it had purchased telecom services provider and data center operator PAETEC for $2.3b, picking up 7 data centers and an expansive fiber network in the deal.

While the big boys dominated the data center M&A scene, some relatively smaller, regional telcos moved into the cloud services space with a string of acquisitions in the latter half of the year. In July, New York-based Warwick Valley Telephone snatched up Philadelphia-based hosted VoIP and managed services provider Alteva for $17m. Then in November, Kansas-based telco Twin Valley Telephone acquired a majority stake in IT services and cloud computing company, ISG Technologies. Most recently, North Carolina-based ILEC North State Communications acquired a neighboring managed services provider and data center operator, DataChambers, to round out a busy year for the telcos.

While the size and scale of the data center and cloud purchases varied in 2011, the acquiring telcos shared similar motivations in making their deals. First,  the acquisitions furthered their efforts to diversify service and revenue mixes, shifting away from their reliance on traditional voice lines. Secondly, whether buying managed services providers, data centers, or both, the companies acquired portfolios of services targeted towards the higher ARPU-business customers. Lastly, through investing in data centers and cloud services, telcos are getting into businesses with attractive growth profiles.

Though projections of future growth in cloud spending and adoption range widely, all forecasts for the industry point upward. IDC estimates that spending on public cloud infrastructure will expand by a compound annual growth rate of 27.6% over the next four years, reaching $73b by 2015. Meanwhile, the Open Data Center Alliance (ODCA) expects cloud adoption amongst businesses of all sizes to triple over the next two years, with 40% of companies moving towards a cloud based computing infrastructure by the end of 2013.

The industry outlook for data centers is equally bullish, fueled at least in part by companies looking to outsource IT infrastructure to data centers. Data center industry analyst Clayton Moran expects colocation spending to increase 15%-20% in 2012, while a recent Gartner study projects that spending on data centers will hit $127b by 2015, up from $88b in 2010. 

By contrast to these rosy outlooks, telcos lost another 10% of voice access lines in 2011, and continue to face stiff competition from the cablecos, satellite providers and OTT providers for television and Internet market share. Although competition exists within cloud services and the data center space, these industries are growing. Telcos can also integrate their colocation and managed services with their traditional voice, video and Internet offerings, differentiating themselves from other communications providers.

Along with the potential for growth, moving into managed services and data centers will also bring about new challenges for telcos. The cloud services business is technology intensive and evolving rapidly, requiring providers to manage the changes in technology and to adapt quickly to clients needs. Through M&A, the phone companies have acquired the technology and expertise required to provide these cloud-based services, but managing these technologies and the business going forward is the next challenge. However, based on the flurry of M&A activity in 2011 it is a challenge that plenty of telcos are more than willing to take on.  


The Deal is Dead! Now What?

AT&T and T-Mobile Consider Life Post Deal

After enduring nine months of an increasingly hostile regulatory review, AT&T finally threw in the towel and announced it would abandon its efforts to acquire T-Mobile USA.  Back on March 20, 2011, AT&T announced that it planned to acquire T-Mobile in a transaction valued at $39b.  Although there was plenty of opposition to the deal from the very start, most analysts nonetheless expected the deal to pass muster with the Department of Justice and the Federal Communications Commission, provided, that is, AT&T agreed to sell off large swaths of overlapping spectrum and operations.

In fact, word was that AT&T was ready to sell Leap Wireless spectrum and nearly 25% of T-Mobile’s U.S. subscriber base in an effort to gain regulatory approvals.

But the deal started to spiral south in late August when the DOJ filed suit to block the merger.  When, in late November, the FCC concluded that the deal would cause price increases and harm customers, all that was left was for the Fat Lady to sing.  Stick a fork in it, the deal was dead!

Now we begin the healing process and both AT&T and Deutsche Telekom, T-Mobile’s German parent, have gaping wounds to lick.  AT&T is saddled with what has been estimated to be a $6b deal break-up fee.  In addition to the two carriers entering a seven-year roaming agreement, the package requires AT&T to pay T-Mobile $3b in cash as well as spectrum in markets including Los Angeles, Dallas and Boston.

AT&T ceo Randall Stephenson is probably feeling a little vulnerable now that the deal has been killed.  It’s tough enough that Stephenson had to follow in the shadow of former AT&T ceo Ed Whitacre, who transformed the smallest of the Baby Bells, Southwestern Bell, into AT&T through a string of successful blockbuster deals – the culmination of which was the acquisition of AT&T.  Now Stephenson is faced with having to cut a $3b check to T-Mobile and is left with a core operation whose 4G wireless strategy has suffered a major setback while its principal competitor, Verizon Wireless, appears to be lapping the pack. 

Despite the setback, AT&T vows to continue to invest in its networks and encourages the government to free up additional spectrum.  With respect to investing in its network, AT&T will need to work quickly to meet the build-out requirements associated with the $6.6b worth of mostly B-block 700 MHz licenses it acquired during Auction 73 back in early 2008.  B-block licenses must provide service covering 35% of its geographical area by February 2013.   

Regarding spectrum, and perhaps as in a gesture of goodwill following a brutal past nine months, the FCC approved AT&T’s previously announced $1.9b acquisition of D- and E-block 700 MHz licenses from Qualcomm just two days after AT&T officially quit the T-Mobile deal.  The Qualcomm deal gives AT&T as much as 16 MHz of new 700 MHz spectrum and should help the carrier assemble the 20 MHz of contiguous spectrum necessary to provide robust 4G services in many markets.  But it is highly likely that AT&T will once again be shaking the trees for available spectrum, particularly 700 MHz spectrum.

As bad as things seem for AT&T, they’re probably even worse for T-Mobile.  Yes, T-Mobile ceo Philipp Humm will get $3b of cash and some pretty nice wireless licenses to soothe the pain but at the end of the day the spectrum-poor T-Mobile has some serious strategic issues.  There is plenty of speculation that T-Mobile will rekindle talks with Dan Hesse and Sprint.  Reportedly, Sprint and T-Mobile were close to a deal earlier in the year before AT&T threw a wad of cash at Deutsche Telekom.  In fact, just a few days before AT&T announced that it had come to a $39b agreement to acquire T-Mobile, the Wall Street Journal was reporting that Sprint and T-Mobile were closing in on a deal.  Other options for T-Mobile include acquiring Leap Wireless or doing a data deal with Clearwire.  There is even talk that T-Mobile might team up with DISH Networks, which finds itself with a bunch of spectrum in search of a wireless strategy after its acquisitions of DBSD North American and Terrestar Satellite Network. Interestingly, there is also an increasing buzz that AT&T may itself be making a run at DISH.

But it wasn’t just AT&T, T-Mobile and Deutsche Telekom who lost out on the deal.  According to reports, there were seven banks lined up to receive $150m of fees if the deal closed.  No deal means scaled back Holiday plans for a number of “poor” Wall Streeters!


North State Diversifies Services with DataChambers Buy

ILEC to Acquire North Carolina-based Data Center Operator

High Point, North Carolina-based North State Communications announced on December 15th that it has entered into an agreement to acquire Winston Salem-based DataChambers, a data center operator and managed services provider. Financial terms of the deal were not disclosed. With its acquisition, North State becomes the most recent LEC to venture into the data center and managed service space, joining Warwick Valley Telephone (Alteva) and Twin Valley Telephone (ISG Technologies).

DataChambers is a ten year old company that provides data colocation and disaster recovery services for small-to-medium sized businesses within the Triad region (Greensboro, Winston-Salem and High Point) of North Carolina. The company currently operates two data centers in Winston-Salem, encompassing 120k square feet of data storage and disaster recovery space. It has also expressed interest in adding a third data center in order to increase its capacity. DataChambers' current roster of clients includes businesses from a variety of industries, including North State itself.

Upon the deal’s close, DataChambers will operate as a wholly-owned subsidiary of North State and Nick Kottyan will retain his position as ceo of the acquired entity. North State however will not acquire DataChambers’ records management segment, which provides hardcopy paper storage and management for customers.

The deal makes sense for North State on multiple levels. Geographically, North State operates in the same Triad Region of North Carolina that DataChambers calls home, and both companies serve the same business customers. From a competitive standpoint, the acquisition provides North State with a portfolio of business-centric services that it can offer alongside its broadband voice, video and Internet services, differentiating itself from other communications providers in the area. The independent LEC will also be able to cross-sell its existing business customers on DataChambers’ colocation and disaster recovery services, generating incremental revenue in the process. 

Most importantly, the data center/managed services space offers North State the potential for growth. Gartner projects data center spending to reach $99b in 2011, a 12.7% annual increase from 2010, and it forecasts that figure to rise to $127b by 2015. North Carolina in particular has become a hot-bed for data center development—with the likes of Apple and Google spending north of $1.6b to build properties in the state—thanks in part to its cost effective electric grid and relatively cheap land.

Consistent with the strong industry growth, DataChambers has improved its top line significantly over the past three years. The company grew its revenues from $3.5m in 2007 to $6.8m in 2010, expanding at a compound annual growth rate of 26% over that time frame.

While North State has not released details on how much it will pay for DataChambers, we have seen a number of priced data center deals over the past year, allowing us to make some educated estimates on the deal’s price tag. The weighted average revenue multiple for observed data center purchases in 2011 is around 5.4x while the median revenue multiple comes in at 4.3x. Based on these levels, and using DataChambers’ $6.8m revenue in 2010, we derive a price estimate in the range of $30-$36m.

In September, North State attempted to increase the visibility of its business services, rebranding its business segment “North State Business.” It stated that the name change reflects the type of customers that are critical to the LEC’s growth and longevity. The acquisition of DataChambers reinforces this sentiment.


Cable Deal Multiples Decline in 2011

Buyers Paid an Average of 1.9x Revenue and $2,286 Per Sub

In the first half of 2011, cable acquisitions were few and far between. Aside from a sprinkling of system sales, all was quiet on the cable M&A front. Then June hit, and with it came a flurry of deals, mostly mid-sized, involving both the larger cablecos and regional operators looking to edge-out their service areas. Year to date there have been 21 cable deals announced involving nearly 1.1m cable subscribers. Of the 21 transactions, there were 12 priced deals that totaled $3.58b.

Time Warner was the biggest and also one of the most frequent buyers in 2011, spending more than $3.26b on three acquisitions. It started off small in May, picking up a cable system in Ohio from CoBridge Communications, but then made the year’s two largest cable buys shortly after: a $260m systems purchase from NewWave in June, and its $3b acquisition of Insight in August. Time Warner picked up 826k subs in its 2011 deals, paying around $3975 per sub. For Insight’s 750k customers, it paid an average of $4,000 per sub, the steepest multiple observed during the year.

Another frequent visitor to the deal table has been Charter, involved in four separate deals in 2011. Much of Charter’s activity was centered on building a cluster of cable systems in a pair of Southeastern states. In March, Charter cut a deal to with Windjammer to acquire cable assets in Georgia and Alabama, and it later swapped systems in the same states with James Cable. Then, in July, Charter agreed to buy another Georgia cable system from Northland Cable. In total, Charter’s acquisitions were on a much smaller scale compared with Time Warner’s activity, as it netted only 26k subs overall.

While Time Warner and Charter were repeat buyers, there were two companies more than willing to take the other side of the deal in 2011. US Cable exited the cable business completely with a trio of system sales during the year; while CoBridge Communications unloaded a handful of its cable systems in three separate transactions, just months after it entered the cable space.

Backed by The Gores Group, CoBridge began investing in cable in October 2010, acquiring 36 systems from Charter for an undisclosed amount. The ink on that deal was barely dry before CoBridge sold off a portion of those same systems to Knology in February 2011 for $30m. Later in the year the company dealt more cable assets to NTS Communications and Time Warner. While CoBridge’s strategy upon entering the cable business was to acquire undervalued, turnaround properties, the company may have bought into the industry at an inopportune time.

A comparison of deal multiples from 2011 to 2010 indicates that values in the cable industry have dropped off this year. The average revenue multiple we have observed for deals announced in 2011 has been around 1.9x, compared to an average price tag of 2.8x revenue for cable deals announced in 2010. Prices have fallen off about 23% on a per sub basis as well in 2011. Buyers on average have paid $2,286 per cable subscriber this year, compared to $2,976 per sub in 2010 cable deals.

Some private equity players, perhaps recognizing a softer cable market, decided 2011 was the time to exit its cable investments: MCG Capital sold its share in Avenue Broadband, and the Carlyle Group sold its stake in Insight to Time Warner. Other potential cable sellers had difficultly attracting acceptable bids on properties they were looking to deal. Charter pulled its LA systems off the auction block in September after bids came in much lower than the $2.5b, or $4,500 per sub, it was hoping to attract.

The decline in observed deal multiples however can be partially explained by the type of properties that were dealt in 2011. Many of the systems that changed hands were either located in rural, sparsely populated regions or were in need of maintenance and thus more capital investment. Wave Broadband and Baja Broadband for example targeted outdated properties at “value” prices that were in need of repairs and upgrades, but which also offered the opportunity to expand ARPU. In its purchase of cable systems from Broadstripe, Wave paid just $533 per sub, the lowest per customer multiple observed this year.

The presence of opportunistic buyers such as Wave and Baja implies that even in a down cable market, the cable M&A scene promises to remain active. But with companies looking to make more strategic, “tuck-in” and “edge-out” acquisitions around their current footprints, we are more likely to see a steady dose of small to mid-sized cable purchases in 2012 and less Insight-sized deals.