Before Birch Merger, Cbeyond Considered Other Deals

By Josh Long

**Editor’s Note: Please click here for Channel Partners’ complete coverage of Birch’s pending acquisition of Cbeyond.**

Before it finalized its $323 million agreement last month to be acquired by Birch Communications, Cbeyond Inc. was seriously considering other strategic deals, the company disclosed Friday in a regulatory filing.

One of the agreements included the possibility of Cbeyond acquiring a company. Rumors flew earlier this year that Cbeyond and MegaPath were considering a merger, putting a twist on Cbeyond’s April 21 announcement that Birch was the buyer.

MegaPath may well have been one of the dozens of companies contacted early this year by Cbeyond’s financial advisor, UBS.

In early February, UBS advised Cbeyond that Birch was interested in buying the company. That was a month after UBS contacted a total of 58 companies, including eight targets for acquisition and 50 companies that could potentially acquire Cbeyond, according to the Securities and Exchange commission filing.

On April 19 – during a meeting attended by Cbeyond’s board of directors and executives, UBS and Cbeyond’s outside counsel Latham & Watkins – the board of directors adopted resolutions to approve the Birch merger.

“During the discussion, the board members noted that neither the potential acquisition of Company A nor the proposed purchase of Cbeyond by Company B were near to actionable, that both would require significant additional time and negotiation and that the merger agreement with Birch would provide superior consideration to stockholders in the next several years as compared to a ‘standalone’ strategy for Cbeyond,” Cbeyond disclosed in a preliminary proxy statement, which asks its shareholders to approve the deal.

On March 31, Birch submitted a proposal to acquire Cbeyond at $9 per share and indicated that it could execute an agreement within one to two weeks. Another company expressed interest in buying Cbeyond for $8.96 per share, but it failed to show that it was able to finance the deal, according to the proxy statement. A “Financial Sponsor” also submitted a letter of intent for a per share price of $6.96.

A week later, Birch upped its offer to $10 per share based on the assumption that Cbeyond would have 32.3 million outstanding shares of common stock outstanding at the closing of the acquisition.

Cbeyond’s board has determined the acquisition by Birch is in the best interest of shareholders. According to the company, assuming that the per share merger price is $9.97 – the lowest price anticipated under the deal – Cbeyond shareholders will receive a premium of 40.8 percent above the closing price ($7.08) of Cbeyond’s stock on the last trading day before its board voted to approve the merger.

Although “multiple parties expressed interest in continuing discussions with Cbeyond,” it was Birch that “submitted the highest and most complete bid,” the company said.

Last year, Cbeyond undertook a strategic review of its business after revenues failed to meet expectations and the stock price declined amid the company’s heightened focus on targeting IT and cloud services.