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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