Fusion Connect Files Chapter 11 Bankruptcy

Fusion Connect on Monday became the latest company in the channel to file for chapter 11 bankruptcy after its acquisitions of MegaPath and Birch Communications’ cloud and business-services business failed to meet performance projections.

Fusion and each of its U.S. subsidiaries filed voluntary petitions in the U.S. Bankruptcy Court for the Southern District of New York. It expects to emerge from chapter 11 before the end of the year. Fusion entered a restructuring support agreement (RSA) with lenders holding more than two-thirds of the aggregate outstanding principal amount of its first-lien loans.

Windstream filed chapter 11 in February, and Sungard AS filed and exited chapter 11 last month.

Senior lenders, owed about $574 million, could take over the company under a proposal to slash debt by $300 million unless a court-supervised auction prompts a more lucrative deal. A bid procedure motion will outline the sale process, and Fusion‘s management team and advisers will consider bids for its U.S. and/or Canada operations, but Fusion won’t be selling off individual assets. The court then would approve the sale.

A spokesperson for Fusion tells Channel Partners the company is “seeking new owners through this sale process to build a strong path forward. If we do not receive a higher offer than their baseline, our existing lenders have already agreed to take ownership. This will significantly delever the business and ensure that Fusion has the financing required to continue running our business and making investments that benefit of our agents, customers and stakeholders.”

Fusion borrowed $680 million, including the senior lender loans, to acquire Birch and MegaPath last year.

Mike Sapien, Ovum’s vice president and chief analyst of enterprise services, said concerns about the company’s finances arose from the Birch and MegaPath acquisitions, low growth network/communication trends and the debt that it created.

Ovum’s Mike Sapien

“Due to the lack of growth and this debt cost, it was going to be tough row for Fusion,” he said. “Fusion was doing well prior to this in making the pivot to cloud-based communications, but these two acquisitions, associated debt and slow-to-no growth increased the risk that it would be unable to pay the debt costs. In a low-growth environment, it will be hard for Fusion to turn its business around and [will] make it a lengthy process.”

The RSA outlines a “clear path forward to significantly deleverage Fusion’s balance sheet, leading to a potential material reduction in interest expense, which would allow for more investment in enhanced customer experience, product innovation and infrastructure,” Fusion said.

In a letter to Fusion’s partners, chairman and CEO Matthew Rosen said his company is committed to paying all commissions in full and on time, and it will continue to deliver the same portfolio of advanced cloud communications and secure managed services.

“We continue to measure our success by your success, and as we strengthen our financial position, we fully expect …

Fusion Connect’s Matt Rosen

… to find even more ways for us to sell, compete and grow together,” he said. “You may recall that our lenders had provided us with funding during this process and we are pleased to share that our lenders have agreed to provide us with additional financing that will total $59.5 million. Along with Fusion’s usual cash flows, this will ensure that we will be able to operate our business as usual and fulfill our commitments to our valued customers and other stakeholders.”

Fusion said all of its businesses are operating as usual. Its has filed first-day motions designed to allow it to maintain its employee wage and benefit programs, customer and agent programs, and vendor payments for goods and services delivered in the ordinary course of business, subject to court approval.

Fusion’s two Canadian subsidiaries are not included in the chapter 11 filing.

“Not sure about winners here (competitors may win in the short term), but the losers may be Fusion and its customers while it goes through this process,” Sapien said.