Earthlink (NASDAQ:ELNK, news, filings) took another big step toward becoming a major national CLEC, announcing this morning a definitive agreement to purchase the struggling One Communications. The price will be $370M, including $285M that will go to paying off debt. The EV/EBITDA multiple for the deal was given as 3.7, reflecting $80M in trailing twelve months EBITDA plus $20M from synergies to be realized.
Earthlink will integrate the assets of One Communications with its New Edge Networks business and the recently acquired Deltacom. There is a bit of overlap between One’s footprint of 629 collocations and the northern edge of Deltacom’s fiber network, but not too much. For One Communications’ 1500 employees, I doubt there will be too much in the way of upheaval in the short term.
Whatever Earthlink’s plans are, I don’t think they are done – a fact borne out by the company’s adjustment to its dividend today. The purchases of One Communications and Deltacom seem like the first half of a larger plan in which Earthlink pieces together a national footprint that equals more than the sum of its parts. I think that means they need more metro fiber somewhere. Perhaps they are the ones said to be taking a close look at Alpheus down in Texas.
I had thought that PAETEC (news, filings) might win this one, in that there were probably more synergies to be had with an overlapping footprint. But Earthlink has a full wallet, which obviously counts for a lot.
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Categories: CLEC · Mergers and Acquisitions
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Perhaps another choice might be the Covad+Megapath+Speakeasy merger owned by Platinum Equities that you already posted a newsclip for back in 06/10/10. With $500M in combined sales (Covad alone had 2008 sales tracking ~$480M in 2008), it sounds like despite being a nationwide rather than regional network, they too are struggling.
Could be, that would add scale to the New Edge side of their business.
Rob,
This seems like a low price. You can infer a revenue base for Choice One of $540 million and 14.6% EBITDA margins prior to any cost savings. This is on the very low end of recent transactions at 4.7 times pre synergy cash flow and 68 cents on the revenue dollar. I don’t know the company but that must be some iffy revenue– high % of legacy voice? Equipment sales revenue? You have any insights?
In many ways, One’s valuation must be seen through the same looking glass as Deltacom’s. They have some fiber, but their business of selling T-1s and such doesn’t leverage it well. Their margins are lower than Deltacom’s were and revenues were under even greater pressure, and hence they got an even worse multiple. That and the fact that they needed to sell more than anyone needed to buy.
Given ONE is private, I have no data on revenue trends. Do you have this information? I have an emotional need to justify the price of this deal.
Nothing formal, just word of mouth. Could be wrong of course.
While Rob is incorrect regarding fiber (One Comm has zip, zero, nadda), his other comments are spot on. I would add that the startling proportion of its revenues from POTs and voice has meant and will mean susceptibility to churn and substitution.
What happened to the excess fiber. The 2006 merger of Choice, CTC and Conversent announced 10k miles.
The Ntelos acquisition of the One Comm Fibernet sub only included 3.5k.
Did they dispose of some previously?
I’ve assumed they had some fiber IRUs around somewhere, whether they are using them or not. It has never been clear to me just what form their ‘fiber-based’ network took on the ground.
I should have been more clear. One comm may have internodal fiber (i.e. between POPs otherwise known as backbone), but assure you it doesn’t have any in the last mile, where — in my view — the economics are most important. Long haul transport fiber has been a commodity for years and drives nominal COGS improvement.