Entries in Deals - Network (2)


Birch Continues “Tuck-In” Acquisition Strategy in Florida

Georgia-based CLEC Acquires Operating Assets from AstroTel

Atlanta, Georgia-based CLEC and managed services provider Birch Communications announced on January 3rd that it has signed a definitive agreement to purchase the operating assets of AstroTel, a Sarasota, Florida-based CLEC. Through the deal, Birch will acquire AstroTel’s IP-based network that spans multiple cities along Florida’s West Coast.

Birch kicks off the New Year utilizing a growth strategy that it has stuck with for the past five years: using M&A to expand its private, IP-based network and to extend the reach of its services. Birch offers IP-based communications services in 38 states and has implemented a “tuck-in” acquisition strategy through which it targets properties that will expand its IP network near its current footprint and increase customer density in its existing markets.

While Birch’s roots are as a local telephone provider and long distance reseller, the company has since moved into managed communications and IT services, which it delivers to small and medium-sized business customers over its private IP network. Since 1997, Birch has grown its client base from 100 customers to over 100k customers, primarily through acquisitions.

The AstroTel deal represents Birch’s 14th acquisition since 2006, and its second Florida-based purchase in recent memory. In October 2011, Birch closed on a deal to acquire the assets of Orlando-based CLEC Cordia Communications for $8m.

A home state is not the only characteristic that Cordia and AstroTel share.  AstroTel, like Cordia at the time of its acquisition, has been operating under Chapter 11 for the past year.  It filed for bankruptcy protection in early-2011, reporting only $325k in assets and $675k in debts. AstroTel’s Chapter 11 filing coincided with an antitrust lawsuit that the CLEC brought against Verizon, in which it claimed anticompetitive actions on behalf of Verizon that included illegal cross-subsidizing of unregulated Internet services and intentional impairment of services to AstroTel subscribers. AstroTel’s lawsuit against Verizon is still pending.

While financial terms of the deal have not been disclosed, based on AstroTel’s distressed financial position, Birch likely picked up AstroTel’s assets at a discount. Over the past few years, the CLEC deals we have observed involving companies in Chapter 11—including Birch’s purchase of Cordia—have carried an average price tag of 0.2x revenue. According to its bankruptcy filings, AstroTel generated approximately $1m in revenue during 2009 and 2010.

While the AstroTel purchase marks Birch’s first deal of the year, odds are that it will be the first of many deals for the company in 2012. In June, Birch secured $77.5m in debt financing to help fund future acquisitions and network development. 


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.