OnFiber Acquires Telseon

OnFiber Communications Inc., a metropolitan wholesale carrier, has acquired its rival Telseon Inc. for pennies on the dollar, marking the company’s second bargain acquisition over the last three months.

OnFiber, a privately held company based in Austin, Texas, acquired most of Telseon’s assets – valued at $85 million – for between five cents and 20 cents on the dollar in cash, equity and debt assumption, says OnFiber marketing director Michael Rees.

OnFiber is gaining 90 new wholesale customers, including Cable & Wireless USA, eBay and Williams Communications Group Inc., through the merger, swelling its service contracts by 40 percent to $39 million. Telseon also brings OnFiber to the Denver and Miami markets and expands its presence in some existing markets. The deal brings OnFiber’s total points of presence to 100.

Telseon, a privately held company, had been rumored to be struggling for months. The metro provider had raised $206 million in equity and secured $75 million in vendor financing. Telseon’s last funding round came in January. The company raised $20 million, although Communications Industry Researchers analyst David Gross claimed Telseon Chief Executive John Kane had to get on his “hands and knees begging from the investment community.”

Telseon’s private investors will receive some equity through the OnFiber transaction, Rees says. Telseon investors Bruckmann, Rosser, Sherrill Co.; Ovation Capital Partners; and Sevin Rosen Funds did not return phone calls seeking comment.

OnFiber CEO Danny Bottoms and Kane had been “friendly competitors” for approximately two years and had talked in the past about a possible merger, Rees says. Those discussions turned more serious early this summer when Telseon’s management faced a cash crunch and recognized it was time to find an option to retain its current customer base, he says.

OnFiber expects to retain a portion of Telseon’s 40-member workforce. Kane will not be joining, although Kane has “been pivotal in this whole thing,” Rees says.

The Telseon acquisition marks the second time OnFiber has scored assets for pennies on the dollar. In May the company announced acquiring network assets and customer contracts from Sphera Optical Networks for approximately $2.3 million as part of Sphera’s Chapter 11 bankruptcy case. OnFiber estimates it paid less than 10 cents on the dollar for the assets, Rees says.

The buying spree may not be over. OnFiber is looking at other possible mergers. “We are very surgical at this point about it,” Rees says. OnFiber estimates it needs to have a presence in one or two more cities, Rees says.

The recent acquisitions have served various functions. The Sphera deal gave the company geographic diversity while the Telseon merger afforded OnFiber a deeper footprint within cities and a strong presence as an Ethernet provider, he says.

Although the metro market is ripe for consolidation, the demand is real, says Jon Cordova, directing analyst of access networks for Infonetics Research. “Clearly there is a void in the metro so definitely that market needs to be addressed but there have been too many players like there has been in other markets,” says Cordova.

OnFiber already held a decent position in the metro wholesale market before the acquisition, Cordova says. The company’s revenue is modest. Last month OnFiber disclosed it was posting $1 million in monthly recurring revenue. The company anticipates reaching cash flow positive in the third quarter of 2003.

In contrast to other metro providers that expanded too fast and burned through hundreds of millions of dollars, OnFiber has gradually built its network and paid a comparatively small price for assets that it has acquired virtually “overnight,” Cordova says.

OnFiber’s investors include Kleiner Perkins Caufield & Byers, Incepta, Bear Stearns Merchant Banking, Telesoft Partners, Amerindo Investment Advisors and GE Capital.

OnFiber operates networks in Atlanta, Chicago, Dallas, Denver, Houston, Los Angeles, New York City, Miami, Philadelphia, San Francisco, Seattle and Washington, D.C.