There had been rumors for several days foreshadowing it, but the deal is now official [EDIT: here’s the PR] according to the Wall Street Journal. PAETEC (news, filings) has agreed to purchase privately held Cavalier Telephone for $460M in cash. The fact that Intellifiber, the regional and metro fiber arm of Cavalier, was for sale has been known since we reported it here back in May. At that time, I even speculated that one buyer that made a lot of sense was in fact PAETEC. However, it did not occur to me at the time that PAETEC might be interested in buying all of Cavalier, an event which puts quite an interesting slant on things.
By buying Cavalier, PAETEC gets some 17,000 miles of fiber and over 1000 on-net buildings in the Mid-Atlantic, upper Southeast, and the Rust Belt that is most concentrated between Philadelphia and Virginia. They also pickup up a compatible CLEC business in Cavalier’s home turf along the eastern seaboard. But it also comes with a consumer triple play business, something PAETEC hasn’t dabbled in before (that I know of). That probably doesn’t scare them though, PAETEC has its fingers in lots of non-CLEC pies including energy resale, software, and wireless – so what’s one more?
The full details of this deal are not yet apparent, I await the formal PR and SEC filings. Just what Cavalier’s revenue and profitability look like should be an interesting read, and the WSJ article doesn’t specify whether PAETEC will be assuming some debt as well. However, it is clear that PAETEC will have to access the credit markets to make it all happen, as they have only about $125M in cash on hand right now.
The Intellifiber footprint that PAETEC is buying looks like a really nice fit with the MidWestern fiber they picked up from McLeodUSA. Unlike the McLeodUSA deal though, this new fiber comes in a geographical region where PAETEC already has substantial revenue. It has a high concentration of central offices on-net which will likely help them increase margins on their existing revenues over time. Their on-net building count nationally will be over 2000, which means I’m really going to have to stop thinking of them as a fiber-light CLEC. PAETEC still leases access everywhere, but their orientation has clearly shifted toward owning fiber assets.
And that brings up the question of what other assets PAETEC might buy that further their apparent goals. I have long speculated that itcd would fit well, as it would give them a similar fiber asset in the southeast where they also have a large revenue base, and that still seems like a great fit to me. But they also have customers further north and west of McLeod’s fiber, for which they might look at Integra Telecom or if that is too big to digest then perhaps 360Networks. Another idea could be Alpheus down in Texas, which is known to be for sale. But of course they might not have the appetite to do anything further immediately.
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Categories: CLEC · Mergers and Acquisitions · Metro fiber
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Cavalier/Intellifiber had revenue of $378M & adjusted EBITDA of $120M over past 12 months (based on Paetec’s press release). This is a revenue drop of nearly 50% since Cavalier bought Talk America for $251M in 4Q 2006 ($750M in combined as of 12/06).
i think ebitda is lower, 30MM is as if synergies were already in place
The discounted EBITDA multiple is the result of the Cable Biz …. still, the debt load.
Maybe PAET will load the cable biz up with debt and spin it out to shareowners and the public market … Icahn can give PAET pointers on how to do it and keep the NOLs …
Hey Rob Powell
Why do you have it in for deltacom? you said back in aug. you when windstream bought KDL that deltacom would be a good fit, Then in September you said Pactel would be a good fit ..
Do you have some issue with this company or what ? Do tell
I don’t have anything against deltacom. Actually, the company has done a pretty good job lately of raising margins and refocusing on higher quality revenue. It’s just that strategically it feels as if they are more likely to merge than not. And their moves lately have seemed to position the company better for such an event. However, they don’t *need* to do anything soon, so perhaps they won’t.
Deltacom still in play. Who makes the next move…Windstream or PAETEC? For PAETEC, the equipment has no value. However, the fiber in the SE complements the former USLEC equipment and removes their reliance on the ILECs.
As I said, either looks good to me as a buyer from a strategic point of view. All else is timing and funding. Both Windstream and PAETEC may be too busy to make a move in the short term anyway.