Entries in Deal_ITC:Earthlink (2)


NextEra FiberNet to Acquire Grande Communications Assets

NextEra Energy Affiliate to Acquire Grande's Fiber Networks

On November 18, 2010 Grande Communications Networks (Grande) and NextEra FiberNet (NEFN) filed an application with the FCC seeking approval to transfer control of certain assets and customer contracts from Grande to NEFN.  Financial terms of the transaction were not disclosed.

Among the assets to be transferred are assets related to the operation of Grande’s regional long-haul broadband transport business in Texas, Arkansas, Louisiana and Oklahoma, fiber networks, and certain resold interstate circuits in those states, as well as customer contracts for primarily wholesale carrier customers and a limited number of retail end users. 

NEFN is a wholly owned subsidiary of FPL Group Capital, which is itself wholly owned by NextEra Energy (NYSE:NEE).  NextEra Energy is a clean energy company with more than 15,000 employees in 28 states and Canada.  Through its subsidiaries—NextEra Energy Resources and Florida Power & Light Company—the company uses natural gas, nuclear, wind and other renewable resources to generate electricity, with nearly 43,000 megawatts of generating capacity.  NextEra Energy also owns FPL FiberNet, a competitive LEC that provides wholesale and enterprise telecommunications services in Florida and Atlanta, Ga. 

JSICA Observations:  Grande is in the process of building a fiber optic network in Texas, and judging by the company’s website, the company is shedding “non-core” wholesale assets in order to focus on serving residential and business customers.

NextEra Energy already owns fiber assets in Florida and Georgia (through subsidiary FPL)—which it leases to telephone, wireless, Internet and other telecommunications companies—and this deal represents a doubling-down of its investment.  NextEra promotes itself as “America’s top producer of energy from the wind and the sun,” and prides itself on being a “clean-energy company.”  Purchasing the fiber assets from Grande may be a precursor to entering the smart grid arena.

In other competitive LEC news, DISH Network (Nasdaq:DISH) subsidiary DISH Media is seeking approval from the FCC to acquire control of Denver, Colo.-based Liberty-Bell Telecom for an undisclosed sum. Pursuant to the terms of the deal, DISH will purchase shares and acquire majority ownership and control of Liberty-Bell, including the right to appoint a majority of the board of managers, 90% of the equity interests, and 93.1% of the voting interests in Liberty-Bell. Liberty-Bell provides competitive LEC and long-distance services in Colorado, and has limited operations in New Mexico and Utah.

Finally, EarthLink (Nasdaq:ELNK) announced on December 8, 2010 it has completed its acquisition of ITC^Deltacom (OTCBB:ITCD) in a transaction valued at $524m.  This is another deal where fiber is the motivating factor— although ITCD is widely thought of as a CLEC, ELNK is primarily interested in the 16.4k mile fiber network. By acquiring ITCD, ELNK is transforming itself into an “IP infrastructure and services company” focused more on business and enterprise customers and less on its historical residential customer base.


EarthLink to Acquire ITC^DeltaCom

October 2010 Deal of the Month: ISP EarthLink to Acquire ITC^DeltaCom for $516m 

Atlanta-based ISP EarthLink, Inc. (Nasdaq:ELNK) announced on October 1, 2010 that it had entered into a definitive agreement to acquire ITC^DeltaCom, Inc. (OTCBB:ITCD) for $3.00/ share in cash. The transaction is valued at approximately $516m, including assumption of $325m in debt. 

The acquisition will enable ELNK to create a IP infrastructure and solutions company by combining its existing ISP and IP-focused businesses with ITCD's integrated communications business. ITCD's 16,400 mile fiber optic infrastructure in the Southeast includes a 14-state Synchronous Optical Network backbone with 35 metro fiber rings, 294 collocations and 20 voice and data switches. ITCD currently serves over 32,000 small and mid-size businesses, multi-location enterprises, government agencies and wholesale customers in the southeast with services including Multi-Protocol Label Switching (MPLS) and IP-based products. Together, the companies will offer customers a comprehensive suite of Internet, telecommunications and managed services. 

"As the demand for high-quality IP infrastructure continues to rapidly grow, we see a significant opportunity to focus these combined IP networking and managed service capabilities with our strong balance sheet to meet this increasing demand from enterprise level customers, wireless carriers, and multi-location national accounts while creating long-term value for our shareholders," said ELNK chmn and ceo Rolla P. Huff. "The capabilities we acquire with this acquisition will be complemented by our existing New Edge Networks business as we combine our nationwide MPLS network capabilities with Deltacom's state-of-the-art infrastructure. The combined company will be especially well positioned to serve Fortune 1000 companies across the country, one-quarter of which are headquartered in Deltacom's footprint. In addition, the Deltacom assets will enable us to further reduce our consumer ISP cost structure, which we believe will result in additional incremental cash flow from that business in years to come." 

With the acquisition, ELNK's employee ranks will grow from approximately 575 people to just under 2,000 people. The company will continue to be headquartered in Atlanta, GA, and led by Huff, president, coo Joseph M. Wetzel, and cfo Bradley A. Ferguson. 

JSICA Observations: ITCD may have been widely thought of as a CLEC—and indeed it is—but when it comes to this and other deals we’ve recently observed the key motivator is, without a doubt, the 16.4k mile fiber network it owns.  As with Windstream’s recent Q-Comm buy (The Deal Advisor, 9/10, p.1), it seems ELNK is determined to reduce its reliance upon fickle (read high churning) consumers, choosing instead to invest in a robust physical network that will profit as enterprise traffic and wireless backhaul needs grow exponentially. 

ELNK ceo Rolla Huff gushed about the opportunity in the company’s conference call announcing the deal:  “There is going to be a continued explosion of internet traffic that needs to be carried…whether it’s from 4G traffic or enterprise traffic…this is about where we believe the growth will be coming from, it’s all about IP traffic; that’s the root of this business.” 

ELNK’s been seeking a strategic acquisition for the better part of three years…When Huff (who cut his teeth at AT&T Wireless, and who later handled Frontier Communications’ merger with Global Crossing) took the reins back in 2007, he was challenged to reinvent a company that was originally created to provide dial-up Internet access, á la AOL. 

ELNK has been steadily losing customers, and continues to see its top line fall—second quarter revenue was down 18% in 2Q10 compared with 2Q09.  But Huff and his team have implemented a strategy of maximizing cash flow from the legacy business, while building balance sheet strength and returning cash to investors via dividends and share buybacks.  The efforts have been surprisingly successful given the declining core business:  ELNK had more than $740m in cash on the books at the end of 2Q10 and upped its guidance for full year cash flow when it announced the deal.  But until now, the company hadn’t identified an acquisition target that met its criteria. 

ITCD, which has been majority owned by Welsh Carson Anderson & Stowe since the company’s 2002 bankruptcy filing, has been shifting its attention away from retail “POTS” line service to a more wholesale and enterprise focus. 

The company reported 425k voice lines in service as of June 30, spread across 32k customers.  Average revenue per customer per month is approximately $800, but management noted that monthly bills can range from $100 per month to $100,000 per month.  Huff also indicated that the company will be targeting Fortune 1000 companies... ITCD’s services are likely to be packaged with ELNK subsidiary New Edge Networks’ private, wide-area network service, which targets multi-location enterprises. 

Management stressed that the fiber network is of high quality—Huff called it “well fed”—but the deal multiples are relatively modest.  Based on $443.6m and $93.2m in annualized revenue and cash flow in 2Q10, we figure the revenue multiple at 1.2x and the cash flow multiple at 5.5x.  After $20m in anticipated synergies, the OIBDA multiple looks more like 4.6x.

ELNK will use approximately $200m of its cash in the transaction, and noted that its pro forma debt to cash flow ratio will still be a modest 1.84x—implying that the company will continue to scout for additional prospects. 

Also of note in this deal:  both companies were at one point linked to legendary Georgia telecom investor Campbell “Cam” Lanier III.  Lanier owned ITC Holding Company in the ‘90’s, which  started Deltacom, and later invested in ISP Mindspring, which was acquired by ELNK in 2000.