2012Two CLECs in Merger of Equals
by David Shabelman
Published in the Daily Deal
February 26, 2004
Competitive local exchange carriers NuVox Communications Inc. and NewSouth Communications Inc. said Wednesday, Feb. 25, they have agreed to a merger of equals.
The companies, while disclosing no terms, said the combined enterprise will have more than 36,000 business customers and annual sales topping $300 million.
"It really is a 50/50 deal," said a spokeswoman for NewSouth, which is a portfolio company of New York private equity firm Kohlberg Kravis Roberts & Co. "No money changed hands, and there's 50-50 board representation."
Although NuVox's headquarters are in St. Louis, the company's sales, marketing and customer service operations are in Greenville, S.C., only a few blocks from NewSouth.
"They're both private CLECs that have persisted through a tough economy, whereas a lot of other CLECs fell by the wayside," said Kevin Mitchell, directing analyst at Infonetics Research Inc. "They're smart CLECs in that they didn't just go for the sexy DSL, but also had stable voice offerings."
NewSouth and NuVox offer regional high-speed Internet and traditional voice services for local and long distance. Smaller CLECs have suffered in recent years amid mounting competition from telecom carriers and a glut of broadband capacity.
"All of these guys have a hell of an uphill struggle right now," said Farooq Hussain, analyst with research firm Network Conceptions LLC. "The only possible way to survive is to consolidate and leverage some combined market power."
Hussain said there is little incentive for larger CLECs to roll up smaller providers because it is often easier and more cost-effective to introduce their own services. "These are very tightly run operations with business models that are efficient, but don't have flexibility so they're hard to combine sometimes," he said.
NewSouth has raised more than $387 million in venture capital funding since 1997. KKR, the company's largest investor, in March 2003 participated in NewSouth's most recent round of funding of $62.5 million and in 2000 invested $125 million in a $170 million Series D round of financing, with an option to invest an additional $65 million. KKR also led an $85 million round in February 2001.
Other NewSouth investors include Carousel Capital Partners, CIT Venture Capital, Wachovia Capital Associates, First Union Capital Partners, J.P. Morgan Capital and Vaxa Capital Partners.
NuVox raised nearly $600 million in venture funding since 1997. In 2002 it raised $78 million from a group of existing investors, including Goldman, Sachs & Co., J.P. Morgan Partners and Whitney & Co.
Other NuVox investors include Meritage Private Equity Fund, Richland Ventures, Bank of America Capital Investors, Centennial Funds, Norwest Equity Partners, Boston Millenia Partners and Flagship Ventures.
The new entity will be keep the NuVox name, with senior management comprising individuals from both companies. David Solomon, chairman and CEO of NuVox, will continue as chairman of the new company, while NewSouth CEO Jim Akerhielm will assume that position.
Neither company used a financial adviser for the deal. Marshall Sonenshine and Phil Kwun of boutique investment bank Sonenshine Pastor of New York provided a fairness opinion for NewSouth, which also hired King & Spalding LLP's Paul Quiros, Lynn Scott, Lisa Read Blanco, David Cross, Sarah Hoagland and Rakiya Diggs for legal advice.
Kevin Collins and Mark Schade of Houlihan Lokey Howard & Zukin provided a fairness opinion for NuVox, which retained Bryan Cave LLP's Steven Baumer, Denis McCusker and Stephanie Hosler as counsel.