This week's announced purchase of Cbeyond by Birch Communications caught many in the sector by surprise. While Cbeyond had been on the table for a couple quarters, many I had talked to were skeptical they would find enough interest. But with Birch stepping up with a $323M bid, I suspect other service providers making the transition to cloud and managed services may find suitors knocking.
The relatively low public valuations out there today for such assets makes for potential bargains, as compared to the 10x or higher EBITDA multiples you find on the deep fiber end of the scale. The premium Birch paid for Cbeyond relative to where the latter's stock price has been languishing suggests there was a robust auction going on behind the curtain. It suggests there may be more active buyers out there, with private equity looking to show the public markets how to find value again.
One such buyer could be privately held MegaPath, which itself was the product of a three way merger of the prior MegaPath with Covad and Speakeasy back in 2010. In fact, MegaPath was strongly rumored to be Cbeyond's main suitor not so long ago. While that possibility is probably off the table barring a hostile bid, they certainly have other options.
Another possible buyer could be TelePacific, which is also privately held and potentially hungry. The western regional service provider has been busy burrowing into the Texas market since buying Telwest's metro assets there. They could easily make a similar inorganic move into another regional market somewhere, or even find a way to take their model national in one fell swoop.
One potential seller could be EarthLink, another publicly traded company in this sector whose stock price has taken a beating as it tries to take its prior CLEC acquisitions into the cloud and managed era. With Rolla Huff out and the company still seeking solid footing under new CEO Joseph Eazor, the time may be ripe. There's more fiber in there to help with the synergies, and more scale as well. Earthlink's size and customer base may be a better match for someone like MegaPath. And while a few years ago we may have been thinking about places EarthLink could buy fiber out west to go with its eastern footprint, seeing TelePacific do the mirror image doesn't seem that crazy to me.
There's also Broadview Networks still out there, quietly churning off traditional revenues while making the same sort of transition to cloud and managed services. They're still holding down more than $300M in annual revenues and $44M in EBITDA, with about 20% of those revenues now derived from cloud-based services I think. The company's private equity owners have put it up for sale before, and you have to figure they'd be open to reasonable bids.
And those are just the bigger players out there, and doesn't even scratch the surface of smaller buyers and sellers. It also doesn't include related players with more infrastructure of their own like XO (though I can't figure out what Icahn is doing) or even the cable MSOs (though I expect they don't feel the need to grow inorganically right now). I suspect Birch's move into the M&A spotlight may have company before long.
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