Partner Channel - Lightyear's Payment Shows Equity Programs Alive, Kicking

By Tara Seals

Posted: 08/2001

Partner Channel

Lightyear’s Payment Shows Equity Programs Alive, Kicking
By Tara Seals

Lightyear Communications Inc. (www.lightyearcom.com) surprised everyone this summer by paying an equity disbursement to its “founding agents” after a merger with VarTec Telecom Inc. (www.vartec.net) was announced. In fact, contrary to what the dismal capital markets may indicate, the idea of cashing in by selling out is still alive for agent equity players, including TMC Communications Inc. (TMC,
www.tmccom.com) and Trans National Communications Inc. (TNCI,
www.tncii.com).

Originally designed to give loyal agents a stake in a company’s success, the traditional equity play is an exit strategy. If a reseller were to sell its business at a certain valuation multiple, that multiple would be applied to qualifying agents’ bases, which can add up to some fairly hefty bonuses.

Lightyear no longer offers equity options. However, those “founding agents” that enrolled in its original Unidial equity program at a fee of $25,000 seven years ago still are eligible for disbursements in the event of a “qualifying transaction.”

“In Oct. 1998, when Williams [Communications Inc.,
www.williams.com] took a position in us, there was a distribution,” recalls Lightyear’s vice president of agent sales, Stu Johnson. “The agreement is, whenever there’s a substantial change of ownership, it would trigger a distribution.”

Lightyear has decided to pay out equity payments prior to the actual close of its merger with Dallas-based VarTec, in the form of monthly “retention bonuses.” The payments total more than $6 million. Approximately 50 agents with monthly revenues greater than $10,000 are paid a bonus check every month as long as their revenue stays above a benchmark amount set by their December 2000 to February 2001 revenues. Bonus payments will continue on a monthly basis for 12 months or until the close of the merger, whichever comes first.

“It’s exciting because there are always people promising all types of distributions, and not many are there anymore,” says Johnson, citing the economic slowdown that has wracked the industry.

“I hope people aren’t scared of offering [equity programs] and I hope that agents aren’t discounting them based on what’s happened in the industry,” he adds. “Who can say there is not a value in customers and recurring revenue streams? There’s obviously a value to that, whether it’s sold through a merger or acquisition or some type of other transaction, or just an ongoing business value–the ownership concept shouldn’t change based just on what the stock market has done.”

Nonetheless, reseller TMC would have joined Lightyear last December in making good on its equity promise, says TMC CEO John Marsch, if it weren’t for Wall Street.

“We were really close to having a really big story–at the end of last year, we had the deal in place, and we would have distributed more than $2 million to our agents,” he explains. “But because of the stock market crash, the company that was going to acquire us couldn’t pull off their IPO.

“I was going to distribute cash and stock to the agents, but I didn’t want to distribute any private stock,” he adds.

TMC’s business plan was to build the company up for three years and then sell it, sharing the proceeds with its agents. Now those plans still are alive, but in suspended animation.

“I think it’ll take a year to recover, but I think next year should hold some things,” says Marsch. “We’re having record sales right now so we’re doing fine, and agents are just continuing to build their equity.” TMC agents’ equity value has increased to almost $3 million since December 2000.

Marsch says the company that looked to acquire TMC remains interested, and that the deal will happen when the market rebounds.

Sheri Grose, TMC director of communications explains, “One thing we
considered was, unlike many companies, we’re doing really well. We’re profitable and we’re growing and we don’t need to make a deal unless it’s the right deal, profitable for everyone involved.”

TNCI CEO Brian Twomey says equity plays are in a holding pattern, but he has high hopes for a profitable landing in the future.

“When sales will happen will truly depend upon what kind of movement we see in the industry,” Twomey says. “Right now there are fire sales out there all over the place, but if someone’s running a good organization, they’re not looking to sell right now.

“And rates, by the way, are stabilizing, so that’s one factor, and as the CLEC market continues to sort itself out … we’ll get back to a growth in value mode,” he says.

The market is more than a year away from offering true sale opportunities, but the situation is pressure-free, says Twomey.

“Being able to only sell for very short multiples vs. continuing to run at a certain net income every month–right now we’ll run it at the net income,” he says.

The company has close to 50 agents in its equity program. It requires agents to bill $100,000 a month to be eligible for an equity stake. As that base grows, agents earn incremental points for every $5,000, allowing them to build equity stakes based on a monthly revenue formula that goes from as low as 20 percent to as high as 50 percent.

“If we go and sell the business, say for 10 times monthly revenue, and you’re at 50 percent, it means you get five times your monthly revenue in your pay-out,” says Twomey.

The contract also has an evergreen clause stating that in the event of a sale, agents are guaranteed their ongoing residual commissions under the new entity.

TNCI has tied the plan into its new tiered-structure agent program. Premier level partners must meet a minimum of $100,000 per month and are eligible for equity automatically.

Although equity plays are still a real possibility, a tough market has brought realistic expectations to the profile,

says Twomey.

“I think equity is a differentiator; it’s not as important as it was a couple of years ago when there was a lot of enthusiasm about it, and there was a big belief that everyone in the world was going to sell in the next three months,” he explains.

“It’s still a realistic way to differentiate your business,” he notes. “But to get value out of it, you need to show that you have it there, and also that you have a business plan that’s really going to be profitable to get to that point where you’re really increasing the likelihood of winning through the equity program over time.”