Lightyear No More: Birch To Buy 20-Year-Old Reseller

**Editor’s Note: Please click here for a recap of the biggest channel-impacting mergers in Q1 2013.**

Lightyear Network Solutions soon will be a name relegated to the competitive telecom history books. According to a May 14 SEC filing, Lightyear, the Kentucky-based telecom reseller founded in 1993 as UniDial by Sherman J. Henderson III, is being dissolved and liquidated as the result of a $22 million acquisition by Birch Communications Inc.

Lightyear has seen its end coming. The company noted in its 2012 annual report, filed on April 1, that it has “incurred significant losses since inception. … Unless Lightyear can execute a business combination or become profitable, Lightyear may be forced to cease operations or to seek insolvency protection.” To that point, Lightyear showed a net loss of $2.3 million for 2012 and said on April 1 it would start looking for a buyer. The company said it could not stave off continued market pressures, including heightened competition and customers’ shift toward lower-revenue technologies such as VoIP and wireless.

Over the past couple of weeks, Lightyear found its exit strategy a buyer in Birch Communications. Birch, which has a rocky history of its own, has worked to breathe new life into its business model by becoming an IP and telecom managed services provider to SMBs. To do that, the original Birch in 2006, after surviving two of its own bankruptcies, started snapping up competitors’ assets often those of insolvent or weakened companies such as Covista and Cordia. In 2007, it merged with another traditional CLEC, Access Integrated Networks, before rebranding the overall company as Birch. Since then, it steadily has gobbled smaller providers, attracting investor interest along the way and landing continued funding for M&A.

Now, Birch is taking on its 18th and arguably largest acquisition in Lightyear. On May 15, Birch said it will buy Lightyear’s assets and some customers for $22 million. Lightyear’s revenue in 2012 totaled $66.4 million. It served 65,000 customer locations by year’s end, according to the April 1 SEC filing, and worked with 150 agents, who accounted for approximately 85 percent of Lightyear’s 2012 revenue. Birch did not go into detail about how it plans to treat Lightyear’s agent agreements. Brad Smith, Birch’s channel chief, did tell Channel Partners Birch is “looking forward to working with current Lightyear dealers, and their customers, to expand what they are currently able to offer, and give them an opportunity to grow their businesses even further.”

Birch echoed that sentiment in a press release and said it also welcomes Lightyear’s employees, who numbered 140 at the end of 2012, to its fold.

Meantime, Lightyear plans to use net proceeds from the deal to repay its outstanding debt, which includes a $6.25 million promissory note to an unnamed company director. Another $2.2 million will be set aside for any post-closing adjustments or other obligations from the purchase agreement. If there is any money left over after severance and other expenses, Lightyear will distribute the remainder to shareholders. Finally, the $22 million purchase price could go down if Lightyear meets “certain pre-closing financial targets,” it stated in the April 1 filing, or if specific working capital adjustments must be made.

When it comes to severance, the largest payments, equal to their annual base salaries, will go to Lightyear’s top executives. CEO Stephen Lochmueller will receive $240,000; President, CFO and COO Randy Ammon is in line for $180,000; and John Greive, vice president of regulatory affairs and general counsel, stands to make $135,000. Each has agreed to remain with Lightyear through the “complete wind up and dissolution” of Lightyear, the company said in the SEC filing, and would receive the same amount of money if they are involuntarily terminated without cause.

For Birch, the Lightyear transaction piles on the possibilities. First, the deal complements Birch’s operations in Kentucky and adds new markets for it in the Bluegrass State. But more importantly, Birch soon will serve 11 states via its MetaSwitch-based IP network, and all 50 states and the District of Columbia through its resale agreements.

The addition of these assets … greatly enhances our hosted PBX, SIP trunking, VoIP-based services and carrier services,” said Chris Aversano, Birch COO, in a press release.

Despite those advancements, Craig Clausen, executive vice president of research firm New Paradigm Resources Group, said Birch has been “plodding along for some time now.” Thus, the Lightyear acquisition could give Birch the push it needs to keep moving away from the legacy CLEC model that remains threatened by the IP revolution.

“[Birch’s] IP efforts have largely been on the core network side and they havent yet broken free of, lets call it, established telecom thinking” around pipes, connectivity and bandwidth,” Clausen said. Birch has not yet moved into a “West Coast” mentality, he said, or thinking in terms of apps, services and solutions even though the company calls itself a managed services provider.  

Lightyear, on the other hand, has branched out more from its reseller roots into IP, Clausen noted.

“Lightyear has been sticking to … a geographically tight market, but theyve begun to develop some of that West Coast mentality which is the real value of offering true hosted VoIP,” Clausen said. “It helps telecom types understand the power of software apps, IP and, increasingly, Ethernet.”

By adding Lightyear to its operations, then, Birch could be on to something more than geographic expansion.

“If the integration occurs with some forethought, in addition to an established, scalable platform, perhaps the real assets Birch is getting center around understanding and embracing apps and solutions over pipes and bandwidth,” Clausen said.

The transaction is subject to Lightyear shareholder approval, customary regulatory approvals, and other conditions. It is expected to close in the third quarter.