PAETEC Kicks Into Serious Super CLEC Mode With $460M Cavalier Purchase

COMPTEL PLUS  PAETEC Holding Corp. will become a nearly $2 billion-per-year CLEC with the acquisition of fiber services provider Cavalier Telephone Corp.

Buying Cavalier, based in Richmond, Va., pushes PAETEC from about $1.58 billion in annual revenue to $1.95 billion, executives said on Monday, when the deal was announced. PAETEC will pay $460 million in cash and, in return, own valuable assets including Cavaliers Intellifiber Networks division.

The fiber holdings which were priced lower than normal due to the still-struggling economy are key for PAETEC, as metro and long-haul bandwidth consumption fuel demand for fiber transport (Cavalier doesnt offer wireless backhaul). PAETEC will boast 10,609 metro fiber-route miles and 37,023 total fiber-route miles when the deal closes. Plus, Cavaliers networks complement PAETECs existing routes and expand some. That will translate into less reliance on Bell networks, PAETEC CEO Arunas Chesonis told VON/xchange, and give PAETEC negotiating leverage for better special access rates from Verizon Communications Inc. PAETEC could move a lot” of metro and long-haul business from Verizon to the likes of Global Crossing and Sprint Nextel Corp. if Big Red wont cut a deal, Chesonis said.

The majority of stuff we can give them, we dont have to give them,” if Verizon doesnt agree to more favorable pricing, Chesonis said.

In addition, the PAETEC-Cavalier transaction gives business customers greater assurance. Scale is critical to persuading potential users that a company has the resources to serve them, Chesonis said; with Cavalier in hand, PAETEC is working its way toward a multibillion-dollar annual earnings threshold that many enterprises see as imperative.

Indeed, PAETEC embodies the new super CLEC” breed, as one of the challengers to the incumbents that records billions of dollars in sales each year. And PAETECs strategy goes beyond the enterprise: The Rochester, N.Y.-headquartered company has expanded into the energy, software and data center markets.

For now, though, PAETEC remains focused on closing the Cavalier deal. Shareholder approval wasnt required for this takeover, so now its up to regulatory authorities to give their blessing. Chesonis expects that to happen to within four to six months, with integration of Cavalier completed soon.

I think this will be two years because we have overlay everywhere,” Chesonis said.

Why Intellifiber?

Intellifiber earlier this summer was one of several carriers on the auction block as interest in the fiber sector boiled over. At first, PAETEC considered buying just Intelliber, Chesonis said, but then realized it would be more advantageous to buy all of Cavaliers operations  enterprise, fiber and even residential. Cavalier had paid for top-dollar fiber assets at pennies-on-the-dollar prices and PAETEC would only benefit from that, Chesonis said. Thus, PAETEC is snapping up Cavalier from private equity firm M/C Venture Partners, a well-known investor in the tech space  M/C owns part of fiber operator Zayo, for example.

Cavaliers fiber infrastructure, network assets and corporate culture make it a perfect match for PAETEC and dramatically strengthen the company in the eastern United States,” Chesonis said in a prepared statement.

Chesonis will remain CEO of the combined company, while Cavalier President and CEO Danny Bottoms will head PAETECs fiber unit. That division includes people and properties from PAETEC and its previous acquisitions, including McLeodUSA. Bottoms will expand PAETECs territory past the Northeast, Texas and the Midwest, Chesonis said.

As for other acquisitions, PAETEC is keeping its eyes open for more opportunities. And might that include One Communications, which is seeking a buyer?

I think wed consider all CLECs and fiber companies” as long as value, cost synergies, integration risks and business strategies all fit with PAETECs requirements, said Chesonis.