Entries in Deals: Fiber Networks (39)

Tuesday
Dec062011
DateTuesday, December 6, 2011 at 8:01PM

HickoryTech to Pay $28m for IdeaOne Telecom

Fargo-based CLEC Sells at 2.3x Revenue

HickoryTech (Nasdaq:HTCO) announced today that it has entered into an agreement to acquire IdeaOne Telecom Group, LLC, a Fargo-based CLEC and fiber network provider. The Minnesota-based ILEC will pay a reported $28m in cash for IdeaOne, in a deal that is expected to close by the end of 1Q12.

During its 3Q11 earnings call in November, HickoryTech continued to beat the business and broadband drum, and its purchase of IdeaOne supports the company’s strategy to expand services in both areas. Through the deal, HickoryTech will add 225 fiber route miles and 650 on-net buildings to its current fiber network in North Dakota, and will gain a customer base of 1,900 business and 1,700 residential customers.  

In addition to voice and Internet services, IdeaOne offers hosting, colocation, and data networking services to its business customers, utilizing a fiber network that includes multiple 10 GB fiber rings in and around Fargo. The acquisition deepens HickoryTech’s fiber footprint in the region and complements its ongoing $24m fiber build, that once completed will extend from Brainerd, Minnesota to Fargo.

On a conference call earlier today, John Finke, ceo of HickoryTech discussed the appeal of the North Dakota market, and shed some light on the capabilities that IdeaOne will provide. “There’s a lot of growth (in Fargo). The Fargo market has continued to expand due to the oil businesses. There is very low unemployment there, in the 3% range, and there are a lot of businesses which are expanding. When we built the route in 2010 to Fargo, really it was on a long haul basis to connect to the Fargo market place. We’ve been working with other providers in this market, like IdeaOne, to actually do the last mile termination to customers, so this will give the ability for us to own that last mile network all the way to the customer.”  

Financially, the acquisition will further shift HickoryTech’s revenue mix towards business and broadband services, which during 3Q11 accounted for over 70% of its top line. IdeaOne reported revenue of $11.1m in 2010, 85% of which was generated from business services, and it projects revenue of $12.3m in 2011. The deal will be accretive on a free cash flow basis for HickoryTech as IdeaOne expects its cash flow margins to be in the 40% range for 2011, while HickoryTech’s margins have been just shy of 27% over the past three quarters.

Despite the immediate margin improvement, the company does not expect significant future cost synergies from the deal, as it plans to invest more in Fargo in the coming years. Carol Wirsbinski, coo of HickoryTech, also indicated that integration costs are expected to be insignificant and will be spread over 4Q11 and 1Q12.

At a price tag of $28m, HickoryTech will pay around 2.5x IdeaOne’s 2010 revenue in the deal, but with IdeaOne’s top line projected to have grown 10%-11% YoY, the deal’s run rate multiple should be closer to 2.3x. From a cash flow perspective, the deal will be done at 5.8x projected 2011 OIBDA.

AuthorAdam Brissette | CommentPost a Comment |
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Monday
Oct312011
DateMonday, October 31, 2011 at 3:09PM

Zayo Group Agrees to Pay $345m for 360networks

Collective Fiber Network to Reach 42k Route Miles

On October 7th, Zayo Group announced its agreement to purchase Seattle-based 360networks in a deal set to close in early 2012. The Louisville, Colorado-based Zayo Group has actively pursue deals since its inception in 2007, 360networks represents its seventeenth acquisition in four years.

360networks operates an intercity and metro fiber network of 18.5k route miles across 22 states, providing fiber-based bandwidth, carrier-neutral colocation and other fiber-based solutions to its medium and large enterprise clients. Its network connects more than 70 markets across the United States, including new markets for the Zayo group: Albuquerque, Bismarck, Des Moines, San Diego, San Francisco and Tucson.  Following the deal’s close, Zayo’s collective fiber network will extend 42k route miles and nearly 2m fiber miles.    

There is much familiarity between the two companies, as earlier in the year they entered into an agreement under which the Zayo Group provided metro dark-fiber connectivity to 360networks.  The deal expanded 360networks’ service area into new markets and thousands of on-net buildings, and also increased its delivery speeds for private line, Ethernet and IP transit services.

In addition to its bandwidth infrastructure services, 360networks is a wholesale service provider of VoIP services that include IP origination and IP termination. It is a registered CLEC in 36 states covering 1,606 rate centers that serve 80m people and recently expanded its VoIP presence in Houston, adding 48 rate centers and around 4.5m people to its coverage area.

The Zayo Group has indicated that it will spin-off 360networks’ VoIP operations into its wholly owned subsidiary, Minneapolis-based Onvoy Voice Services, which offers a portfolio of wholesale services to wireline and wireless providers.  Onvoy has been in business since 1992, and was one of Zayo Group’s first acquisitions back in November 2007. Zayo eventually spun-off Onvoy into a separate entity back in March 2010.

While financial terms of the deal were not initially released, Zayo recently reported in an SEC filing that it will pay $345m for 360networks, or approximately $18,649 per fiber route mile.  The purchase is Zayo's largest acquisition to date, five times larger than its 2010 purchase of AGL Networks for $71.5m.

Given that there is no public information on 360networks’ revenue, we don’t know for certain what type of revenue multiple was paid.  In priced fiber network deals over the past year however, we’ve observed average revenue multiples of around 1.2x. If Zayo paid a similar multiple, 360networks will more than double Zayo's top line with the deal. As of June 30, 2011, Zayo’s annual revenue was $287.2m. An estimated multiple of 1.2x revenue paid for 360networks would imply revenues of approximately $288m.

AuthorAdam Brissette | CommentPost a Comment |
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Thursday
Oct062011
DateThursday, October 6, 2011 at 10:15AM

The Gores Group Doubles Down on Fiber with New Buy

Private Equity Firm to Buy Alpheus Communications

The Gores Group, a Los Angeles-based private equity firm has signed an agreement to purchase Alpheus Communications, a fiber network and data center operator in Texas. Alpheus was sold by two Texas-based entities, private equity firm Genesis Park and El Paso Corporation, a Fortune 500 energy company.  El Paso started Alpheus around 2000 as El Paso Networks, and Genesis Park later acquired controlling interest of the company in 2004.

In the deal, the Gores Group will acquire a fiber network that includes 2,800 route miles of long haul fiber and 3,250 metro route miles in major Texas markets—Dallas, Fort Worth, Houston, Austin and San Antonio.  Alpheus provides long-haul telecommunications fiber transport across Texas, targeting telecom carriers and enterprise customers across a number of sectors. It customer base includes 31 wireline and wireless providers in the state. In addition to providing fiber transport, Alpheus owns and operates data centers and offers collocation, hosting and VoIP services. 

Over the past few years, Alpheus has invested heavily in the Houston fiber ring and has expanded its footprint through a number of acquisitions. In January 2010, it acquired a major fiber ring in North and West Harris County in the high tech FM249 areas, a location near several wireless tower sites. It continued its expansion in 2011, purchasing dark fiber rings in East Dallas County and Downtown Fort Worth from fellow Texas provider, Fiberlight.  In addition to growing its fiber footprint, Alpheus has used M&A to build its data center business including the acquisition of Aspen Communications and its IT facilities in 2007.

Alpheus will be added to an eclectic roster of over 80 companies owned by the The Gores Group. The private equity firm invests in a variety of industries from telecommunications to retail, which combined bring in over $15b revenue per year. Its portfolio of companies ranges from an envelope producer, National Envelope, to a fashion designer and manufacturer, Big Strike, and a cable provider, CoBridge Communications.

The Gores Group plans to integrate Alpheus with another company in its portfolio with an expansive fiber network, First Communications. The combined fiber assets between the providers will total 10,500 fiber route miles in Texas, the Midwest and the Mid Atlantic. First Communications offers long haul fiber transport in Pennsylvania, West Virginia, Virginia, Maryland, Ohio and New Jersey.  According to its 2010 annual report, First Communications generated $28.8m last year.

Ashley Abdo, managing director of The Gores Group, commented on its newest purchase. “The acquisition of Alpheus Communications provides Gores with a tremendous opportunity to expand upon our current telecommunications holdings, particularly our fiber and high bandwidth transport services businesses. In addition to the network assets, the deal brings additional sales and operational experience that will help us continue to expand our holdings.”

The deal will shake up top management at Alpheus, with current ceo Paul Hobby stepping aside following the acquisition.  Hobby, a partner at Alpheus seller Genesis Capital LLP, commented that he would likely be the only job loss resulting from the sale.  The Gore Group has chosen Scott Widham to take over the reigns as ceo. Currently Widham serves in the same position in another telecommunications focused company owned by Gore, CoBridge Communications.

Financial terms of the deal have not been disclosed, and Alpheus has not reported its revenue publicly in the past.  Alpheus however was put on the block in 2010, but never sold.  Reportedly, it was hoping for a purchase price of around $400m to $500m at the time.

The exponential increase in demand for broadband Internet access, specifically for 3G and 4G wireless data, has surely increased the interest in fiber assets like Alpheus’ of late. The density of Alpheus’ fiber networks and the position of its data centers near high traffic areas in Texas make it all the more attractive. Perhaps the fiber market has heated up enough so that The Gores Group was willing to pay the price tag that Alpheus sought a year ago. 

AuthorAdam Brissette | CommentPost a Comment |
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Monday
Sep192011
DateMonday, September 19, 2011 at 2:33PM

NTELOS Poised to Split into Two Companies

Strong Growth at Lumos Networks Implied by Current Trading Levels

About nine months after first announcing its intention to split into two companies-a wireless operation that would retain the brand name NTELOS and a wireline operation comprised of the NTELOS wireline and FiberNet fiber operations-NTELOS announced last month that it intends to effect its separation on October 3, 2011.

James Hyde, Michael Moneymaker and the team have worked furiously over the past year to ensure that both sides of the business have attractive growth prospects and achieve better cost efficiencies in advance of the spin. New executives have been named for Lumos Networks—the recently announced brand name of the to-be-spun wireline business—and the company’s second quarter results press release and conference call were filled with discussion related to future growth prospects—although pro forma results for the wireline business in particular did not demonstrate substantial growth just yet…

Investors, nonetheless, appear to be bullish on the split. By analyzing the wireless and wireline segments separately, and comparing to the trading multiples of other public wireless service providers, I was able to back into an “implied” public value for what will become Lumos Networks…and it’s up there.

First, my analysis of the public wireless companies indicated that investors today are paying relatively modest multiples for standalone (non-AT&T and non-Verizon) wireless providers. Each of United States Cellular, Sprint, MetroPCS and Leap Wireless are facing intense competitive issues, most directly from the aforementioned dynamic duo of wireless iPhone fame. But so is NTELOS Wireless. Given that NTELOS derives much of its wireless business via its Sprint PCS wholesale arrangement—and more importantly, much of the anticipated growth is expected from that source—I figure the Sprint trading multiples should represent (at worst) a down side value proxy (Sprint has its own issues weighing on the share price). Sprint is trading presently for about 0.7x revenue, 4.7x cash flow and less than $500 per subscriber-it’s the cheapest of the four comparables. 

But NTELOS Wireless, I believe, deserves better, if only due to its regional focus and the revenue upside it should enjoy as it penetrates its subscriber base with smartphones. Perhaps not dramatically better, but if I base the wireless division valuation on the mean of the four companies, and then the mean of the three values implied by the revenue, cash flow and per subscriber multiples, you get a wireless operation worth about $450m (public value).  That implies more than a billion dollars for the Lumos Networks side of the scale, and multiples of 5.3x revenue, 10.6x cash flow and nearly $5,400 per connection.  These are strong growth multiples!

If I take the high end wireless multiples and apply them to NTELOS Wireless’ recent performance, the indicated value is closer to $550m, which still implies Lumos Networks’ public value is nearly 5x revenue, nearly 10x cash flow and nearly $5,000 per connection.  I guess Lumos Networks is “nearly” considered a growth story!   

I’m only being partially facetious. There’s no doubt in my mind that Lumos, with its aggressive fiber deployment and backhaul initiatives, will enjoy relatively rapid growth over the next few years. But will that growth be strong enough to support today’s trading value? Or have I underestimated the value of the wireless business?

It’s hard to say just yet, but Standard & Poors said at the end of August that it expects to lower the rating of NTELOS (Wireless’) secured debt by one notch upon separation of the two businesses, “reflecting our view that despite the reduction of the term loan from the Lumos dividend, spinning off the wireline properties weakens recovery prospects for NTELOS' secured credit facilities." The press release added, “In particular, that view contemplates the potential scenario in which the Sprint wholesale services contract, responsible for a significant and growing share of revenue, either is not renewed in 2015 or is renewed under markedly less favorable terms. Accordingly, we expect to revise the recovery rating for the secured credit facilities to '3', indicating our expectation of 50%-70% recovery of principal in the event of a default from the current '2' recovery rating, which denotes 70%-90% recovery of principal. “

In other words, S&P doesn’t like NTELOS Wireless as well without the growth prospects of Lumos Networks.

Of course, investors holding the shares today will get to play both sides once the tax-free distribution occurs, presumably in a couple of weeks. The question is, will they continue to hold both pieces of the former NTELOS Holding Corp.?

AuthorRichelle Elberg | CommentPost a Comment |
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Monday
Aug012011
DateMonday, August 1, 2011 at 11:31AM

Windstream to Acquire PAETEC in $2.3b Deal

But is “Growth by Acquisition” Really Growth?

Jeff Gardner and the team at Windstream (Nasdaq:WIN) sure don’t like to let their seats at the deal table grow cold…Monday the company announced its ninth acquisition since the company was formed in a spin/reverse merger between the former Alltel wireline operations and Valor Communications, in mid-2006.  The $2.3b deal for CLEC/fiber network/managed services provider PAETEC (Nasdaq:PAET) is Windstream’s largest to date; when Alltel Wireline merged with Valor, Valor was valued at just more than $2b. Since then numerous sub-$1b buys have been completed (more on that below).

The deal has all of the criteria that Gardner et al have touted in many of the deals announced since 2009:  it will increase the company’s reliance upon business and broadband services—to 70% pro forma PAETEC.  In a press release, Gardner said, "This transaction significantly advances our strategy to drive top-line revenue growth by expanding our focus on business and broadband services. The combined company will have a nationwide network with a deep fiber footprint to offer enhanced capabilities in strategic growth areas, including IP-based services, data centers, cloud computing and managed services. Financially, we improve our growth profile and lower the payout ratio on our strong dividend, offering investors a unique combination of growth and yield."

Under the terms of the deal, PAETEC shareholders will receive 0.460 shares of Windstream common stock for each PAETEC share owned.  Windstream expects to issue approximately 73m shares of stock valued at approximately $891m, based on its closing stock price on July 29, 2011. Windstream also will assume or refinance PAETEC's net debt of approximately $1.4b. PAETEC stockholders are expected to own approximately 13% of the combined company at close, and the deal has been approved by the boards of directors of both companies.

As in most of the deals Windstream has done, management anticipates significant synergies--$100m in operating expenses three years out and another $10m in capital expense savings.  Additionally, PAETEC has significant Net Operating Losses that will provide Windstream with a tax shield; the company pegs the net present value of those NOLs at $250m.  The company expects to incur about $50m in operating and integration costs in the first year after close and will invest $55m in capex over the first three years of ownership.  The deal is expected to close in the first quarter of 2012.  Windstream also said that the buy will slightly delever its balance sheet, after synergies, and reiterated its goal of reducing debt to cash flow to 3.2x-3.4x.  The company has received $1.1b in financing commitments for the deal and noted that its present dividend of $1/year will be maintained.

Running the numbers through the calculator shows the revenue multiple on the deal to be just over 1x run-rate revenue, while the run-rate cash flow multiple is about 6x.  Pro forma the synergies and adjusting for the NPV of the NOLs pushes that cash flow multiple down to about 4.2x.

In its conference call discussing the deal, Gardner pointed out the strong growth profile of the areas where it/PAETEC see their upside:  Wireless backhaul is expected to grow 32%, Ethernet services, 31%; MPLS, 14% and Hosting Services, 9%.

And in the press release, PAETEC ceo Arunas Chesonis said, “Both PAETEC and Windstream are built on a customer and employee-focused culture. Together, with far denser network assets, an expansive fiber infrastructure, and larger data center footprint, I believe our brightest days are ahead.  Our combination now creates a new Fortune 500 company with the financial strength and scale to compete and win against any other provider in the industry.” 

That sounds great guys, and Windstream’s transition from a consumer-centric business to one focused on enterprise and broadband services is clearly occurring.  But what about growth? 

I decided to take a look at all of Windstream’s deals since the company’s inception and analyze the actual growth in revenue.  Admittedly, an analysis of cash flow might better demonstrate the “value” of these deals, but for simplicity sake let’s look just at the top line.

First of all, in all fairness, the “business and broadband” growth strategy didn’t clearly emerge until sometime in 2009. Prior to that, Windstream’s deals were focused on buying scope and scale, pure and simple.  It acquired CT Communications in mid-2007 and also acquired D&E Communications, Lexcom and Iowa Telecom over the next few years.  These telcos probably didn’t offer that much in the way of “B&BB” growth profiles, but synergies and scale should make for improved cash flow. Meanwhile, the NuVox, Hosted Solutions, Q-Comm and PAETEC deals, announced or closed over the past year and a half, all played into the Windstream “B&BB” strategy.

So, I built a chart showing the historic revenue of all of the piece parts that now comprise Windstream. Several of the companies acquired by Windstream were public, and for the four that weren’t I’ve done estimates based on data provided with deal announcements and closing announcements. These estimates may not be perfect, but the trend that we see overall is, in my view, verifiable:  Windstream’s acquisitions have not actually led to measurable growth in the top line on a pro forma basis.  In fact, if you back out PAETEC's very high, also acquisition-fueled growth, the compound annual growth rate for Windstream pro forma is -0.3%.   

As it turns out, Windstream has experienced flat to down results for each of the years since it was formed.  The following quotes are taken verbatim from Windstream’s earnings releases for 1Q11 as well as the full years 2007 - 2010:

1Q11:  Under pro forma results:

  • Revenues were $1.023 billion, a 1.8 percent decrease from a year ago.
  • Operating income before depreciation and amortization (OIBDA) was $496.7 million, essentially unchanged year-over-year.

2010:  Under pro forma results, which include results for NuVox Inc.; Iowa Telecommunications Services, Inc.; Hosted Solutions Acquisition, LLC, and Q-Comm Corporation for the entire year:

  • Revenues were $4.1 billion, a 2 percent decrease from a year ago.
  • OIBDA was $1.98 billion, a 2 percent increase year-over-year.

2009:  Under pro forma results from current businesses, which include D&E and Lexcom results for the entire year:

  • Revenues were $3.121 billion, a 5 percent decrease from a year ago.
  • OIBDA was $1.591 billion, an 8 percent decrease year-over-year.

2008:  Under pro forma results from current businesses: 

  • Revenues were $3.172 billion, a 1.5 percent decrease from a year ago.
  • Operating income before depreciation and amortization was $1.638 billion, a 1 percent decrease year-over-year and includes $8.5 million in restructuring charges.

2007:  Among the pro forma highlights for 2007 from current businesses:

  • Revenues were $3.262 billion, a 1 percent increase from a year ago.
  • Operating income before depreciation and amortization was $1.657 billion, a 1 percent increase year-over-year.

Now, have a look at this line from PAETEC’s first quarter 2011 report:

Actual First Quarter 2011 compared to Pro Forma First Quarter 2010 

The following pro forma results for first quarter 2010 give effect to PAETEC’s acquisition of Cavalier Telephone as if it had occurred at the beginning of 2010…Actual total revenue of $495.5 million for first quarter 2011 represented an increase of 2.5% or $12.3 million over pro forma total revenue of $483.2 million for first quarter 2010. The increase in actual total revenue was primarily attributable to increased revenue from PAETEC’s acquisition of Quagga in June 2010 and U.S. Energy in February 2010.

Sooo…Pro forma PAETEC’s own recent acquisition of Cavalier Telephone, growth in the first quarter was 2.5%--but that is attributable to PAETEC’s buys of Quagga and U.S. Energy…I don’t have the breakouts, but it sounds to me like PAETEC’s actual pro forma revenue trend was negative, or flat at best.

What’s my point?  Deals can be packaged to demonstrate “growth” prospects—and I do think the whole “cloud/data centers/managed services” realm offers a brighter outlook for telephone companies than say, improving DSL penetration. But the real “growth” that these deals appear to deliver is coming from cost cutting and efficiencies created when two organizations combine (i.e. people get fired). And once you’ve cut as much as you can cut, that ice cube is still melting…Even more disconcerting? The pro forma cash flow figures reported above are mostly negative.

AuthorRichelle Elberg | CommentPost a Comment |
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