RESELLER CHANNEL: VarTec-Lightyear Merger Bust Blamed on Banks

Posted: 04/2002

VarTec-Lightyear Merger Bust Blamed on Banks

By Josh Long

VarTec Telecom Inc., the privately held long-distance company known for its dial-around success, has called off plans to merge with Louisville, Ky.-based Lightyear Communications Inc., a switchless reseller, which markets to small and medium-sized businesses mostly through agents.

What could have gone wrong between two companies whose executives seem so chummy at industry trade shows? According to people familiar with the matter, VarTec failed to come to an agreement with the banks over debt covenants it would assume on behalf of Lightyear. One source, speaking in metaphors about staying the course yet remaining flexible enough to change directions, says VarTec simply had to prioritize. The merger with Excel Communications Inc., which was expected to be complete during the first quarter, is the bigger deal, the source says, noting the company booked more than $1 billion in revenue in 2000.

Last year, VarTec and Lightyear said their dynamic duo would accommodate more than 6 million customers and serve more than 200,000 telephone lines. A reported impetus behind the merger was to give VarTec a name in the business sector, where the company could generate revenue off more lucrative data services. It had been argued widely that the residential dial-around business Dallas-based VarTec had pioneered would one day die, says a source familiar with the companies.

Who is to blame for the merger falling apart? The banks, say sources. They wanted to play hard ball with VarTec, imposing rigid restrictions on the debt the company would assume on behalf of Lightyear, according to one source, “They wanted to put a lot of restrictions on it and Joe [Mitchell Jr., VarTec chairman] doesn’t need restrictions,” the insider told PHONE+.

“[The banks] don’t want to be in telecom anymore,” the source says. “They weren’t interested and that is what basically blew the deal. The banks were unwilling to be flexible.”

Indeed, many lenders are fed up with the volatile telecom sector and simply want out, say industry observers. Randolph, Mass.-based Network Plus, a facilities-based provider servicing small- to medium-sized businesses along the East Coast, recently announced it would attempt to sell off its assets in an auction through the U.S. bankruptcy court. Unlike many competitive carriers that simply ran out of capital, Network Plus had more than $40 million to borrow before it filed a Chapter 11 bankruptcy petition in February. But the banks cut off funding at $175 million after the company missed a revenue covenant, a spokesman says. The company did receive permission to borrow an additional $3 million in January and continued to serve customers as of February, he adds.

VarTec spokesman Ken Ball declined to comment on his company’s lender negotiations, and issued a statement explaining why the merger was called off: “By early December 2001 it became apparent [to VarTec) that certain necessary and important conditions required in order to consummate the deal were not likely attainable and, as a result, stalled the merger negotiations between the two companies. Given the continued impasse, VarTec has had to make plans for a future without Lightyear merged into the company.”

The two companies remain intertwined financially; VarTec is probably the largest shareholder in Lightyear, a source says. VarTec’s Ball declined comment.

And the meltdown also appears not to dim the future of at least one top executive. Lightyear CEO J. Sherman Henderson III, likely will step down and join VarTec as executive No. 1, according to one source familiar with Henderson’s current role. Henderson is the perfect man for the job, a “rah, rah, rah kind of guy,” the source says. At press time in late February, VarTec had not named a new CEO. Henderson was the president of the business services unit before the merger talks broke down.

Meanwhile, Lightyear has undergone a radical shift in its business model since last year, shutting down its ATM-based
"SmartStream" voice and data network and letting go nearly its entire direct sales force, relying heavily on its independent partners, such as master agencies, to market its local and long-distance services, which are resold.