This morning's M&A announcement certainly caught me off guard - although perhaps it shouldn't have -and I'm still trying to get my brain around it. Windstream's activity lately in targeting the business marketplace outside its ILEC territory has been very aggressive. But until now geographically they were still very much a regional company even as a CLEC, just as the NuVox and KDL/Norlight footprints were. Buying PAETEC takes what was already a rather radical hybrid ILEC/CLEC plan and takes it immediately national.
I'm a bit surprised though that PAETEC sold out as cheap as they did, which ties in with why I hadn't seriously considered a sale on their part right now. I had thought that perhaps the continuing integration of all that fiber into their business might boost margins over the next few years in ways that would give them more bang for their buck than the apparent valuation of 6xEBITDA of this deal. Of course, the sale does come at a nice premium to Friday's close and their shareholders will still stand to gain from those improvements as 13% owners of the combined company - but still. All indications had been that things were going pretty well with PAETEC's integration too, but we will see more on that front when the company releases earnings next week.
It's fascinating to see that the largest and perhaps most successful CLEC rollup will probably become the flagship in an ILEC's effort to leave leave behind *both* LEC abbreviations on a course for fiber and the cloud. I do look forward to the day when these acronyms are finally retired, although that will certainly take some time. Yet while Windstream's plans are definitely bold, but it remains to be seen if PAETEC's rather unique competitive approach is something they can operate effectively. KDL and NuVox were entirely different beasts.
This deal probably takes two of the industry's most aggressive consolidators out of the game for quite some time: PAETEC for obvious reasons but also Windstream in that this deal has a feel of mid-term goal completion for them that its earlier purchases didn't. I think they're going to be done & working the integration for some time to come following the close.
That leaves several likely targets in the next few years with two less potential buyers. Integra Telecom, Broadview Networks, and XO could all easily have been targets of both Windstream and PAETEC, and hence this may reduce the likelihood they will be next - at least for a while.
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