VarTec to Close Lightyear, Excel in 2002

Posted: 11/2001

Partner Channel Headlines

VarTec to Close Lightyear, Excel in 2002

By Josh Long

In its second blockbuster deal of the year, Dallas-based VarTec Telecom Inc. has agreed to purchase the North American operations of Excel Communications Inc.

Excel, known for its multilevel marketing strategy and massive network of independent representatives, is among the largest U.S. residential long distance providers.

The purchase price will be based on Excel’s actual year-end financial results and will be paid in the form of a five-year interest-bearing promissory note. The price now is estimated at $250 million.

The combined organization will be the largest privately held telecom company and fifth largest residential long distance provider, says Sherman Henderson, president and CEO of Lightyear Communications Inc., a Louisville, Ky.-based integrated communications provider.

Lightyear announced a merger agreement with VarTec last winter.

Excel CEO Christina Gold says Excel Communications, a subsidiary of Canada’s Bell Canada Enterprises Inc. (BCE) following the acquisition of its parent Teleglobe, posted more than $1 billion in revenue last year. The company provides long distance, paging, wireless and Internet services.

VarTec, a licensed competitive local exchange carrier (CLEC) in Arkansas, Kansas, Missouri, Oklahoma and Texas, provides long-distance service to business and residential customers and wholesale long distance to service providers.

The three companies market to their customers in different ways.

The combination of VarTec and Lightyear will accommodate more than 6 million customers and serve more than 200,000 telephone lines, executives said earlier this year.

Henderson, who was named president of the business services unit for VarTec, says the three companies expect to generate $2.1 billion in 2001.

In a press statement, Mitchell said the merger would double the number of VarTec switches and network capacity.

VarTec owns and operates 13 switches throughout the country.

Excel, which serves 2.3 million residential customers in the United States and some commercial customers through eMeritus Communications the commercial services division of Excel with retail and wholesale operations, has 14 switches.

Lightyear, the owner of a packet-based “SmartStream” network, operates 24 data and voice switches.

Henderson says network executives are in talks concerning possible overlap of territories among the three companies.

The mergers, which are subject to regulatory approvals, are expected to close in February or March, Henderson says.

A holding company will be created to manage the three entities, which comprise 5,200 employees. “Massive layoffs” are not planned as a result of the mergers, says Henderson, cautioning the company “hasn’t gotten to that stage yet.”

VarTec and Lightyear each trimmed its workforce this year in response to market conditions and in preparation for the merger. Other executives say it’s too early to consider staff for the

new company.

They stress one thing, however: The agreements will provide new opportunities for sales partners.

As a result of the agreement, Excel’s estimated 175,000 U.S. marketing partners will have a new suite of products to offer customers, says Gold.

Through a multilevel marketing arrangement, the independent representatives recruit people to sell Excel’s services. Partners receive a residual income each month based on monthly bills through their direct sales and are compensated based on their recruits’ sales, Gold says.

Regarding Excel, Henderson says, “They have a distribution channel we could never put our hands on.”

The most recent merger talks began on a green in Palm Springs, Calif., at the Nortel Networks Palm Springs International Film Festival. Henderson was on the golf course with Jean C. Monty, BCE’s chairman and CEO. Monty asked Henderson if he was interested in putting together a deal, according to Henderson. The men later continued the conversation with Mitchell.

“I don’t think market conditions had one thing to do with why we did it,” says Henderson. “Not one thing to do with it.”

A CEO of the new company has not been named.

As of early this fall, VarTec also was negotiating a deal to acquire Excel’s European operations.

Brand Spanking NUI: Company, Agent Program Debut

By Tara Seals

These days, market newcomers are few and far between, but
reseller NUI Telecom Inc. has decided to give it a go. The company, a subsidiary
of Atlantic seaboard energy giant NUI Corp., launched its "Solutions
Express" agency program aimed at expanding its local, long-distance,
wireless, prepaid and data/Internet markets.

"It’s what we call a ‘Prosperity Partnership,’" says
Tom McCrosson, executive vice president of sales and marketing. McCrosson
oversees product development, implementation and the overall revenue generation
for NUI Telecom. The company says its bedrock principle is to "maximize
business’ communications dollar while meeting their changing technology
needs."

Marketing on discount rates is nothing new, of course, but the
company hopes to differentiate via one-stop service. It provides consultative
needs assessment and IT outsourcing solutions along with its suite of products.

That product suite is extensive. It features local and
long-distance voice, calling cards, operator services, fax, voicemail,
conferencing, wireless, prepaid, Internet, web hosting and design, paging, DSL,
IT outsourcing and data storage.

With so many options, and from various underlying carriers, the
company also is positioning itself as a broker for the customer.

"We eliminate confusion and hassles faced by clients
juggling multiple carriers," says McCrosson. "And NUI Telecom is
experiencing significant growth."

The reseller says it aggregates traffic and uses large volume
commitments to get a wholesale discount of up to 30 percent. It also says it
will match any competitive offer.

It places business with Verizon, Sprint Corp., AT&T Corp.
and Qwest Communications International Inc., among others.

Behind the scenes, the agent program offers customized terms, so
agents can participate on a part-time or full-time basis, with no commitments.
The reseller also gives agents reports on the status of orders, new accounts and
their usage, customer traffic levels, problems at-a-glance, slow or non-payers
and commissions.

Its service program includes distributor orientation and
training, sales manuals, presentation materials, product literature, vertical
industry references, affinity member and agent recruitment materials and
proposal-generation services.

On the back-office side, NUI Telecom maintains real-time
electronic connections to its vendors for provisioning. Customers receive a
single statement for all services. The company allows customers to customize
their bills according to their accounting needs with summaries of costs and
usage, or delivery on paper, computer disk, CD-ROM or magnetic tape.

Sprint Affiliate Merger Creates Great Expectations

By Tara Seals

Two Sprint Corp. wireless PCS affiliates, AirGate PCS Inc. and iPCS Inc., have agreed to create a behemoth of a partner serving 300,000 of Sprint’s wireless customers. The move may signal a consolidation trend and a healthier outlook for the carrier’s partners, which until now have remained small, dependent on Sprint and in debt.

The combined company will be the largest Sprint PCS network partner in terms of coverage. The merger is expected to close in February. Once completed, iPCS will continue operations as a wholly-owned subsidiary of AirGate.

The affiliate will be an anomaly for the carrier, which launched its affiliate program in 1998 with an eye to keeping its partners small and able to tackle areas Sprint itself could not reach.

“Sprint affiliates are typically much smaller than the affiliates of other major carriers, specifically AT&T [Corp.] and Nextel [Communications Inc.],” says The Yankee Group analyst Knox Bricken. “AT&T’s affiliates average 15 million PoPs, whereas Sprint’s average 4 million.”

These wireless partners have very little ownership in their businesses, but assume much of the risk.

Affiliates pay Sprint for the use of its brand name. Also, Sprint affiliates do not own spectrum. They lease it from the carrier under a 20-year commitment with three 10-year renewal options. Sprint handles the back-office functions as well.

PCS partners do, however, build out networks and spend heavily on operational costs, meaning they typically carry large debt.

“We believe this serves to infringe on the ability for the Sprint affiliates to effectively grow their businesses and achieve economies of scale without consolidation,” says Bricken. “Thus, we expect the Sprint affiliates to continue consolidating until they reach a size more in line with the AT&T affiliates and other Tier 2 carriers.”

The structure limits PCS affiliate autonomy, but puts Sprint in position to eventually absorb the affiliates.

“Eventually, incorporation into the parent is the exit strategy for all of the affiliates, including AT&T’s and Nextel’s,” says Bricken. “However, this absorption will not occur for several years because … the larger carriers do not want to incur this high debt.”

In the meantime, Airgate and iPCS are taking a “united we stand” tack that could pay off. AirGate CFO Alan Catherall says, the company will be cash flow-positive in the third calendar quarter 2002, with a significant cash cushion.

The outlook is based on sheer volume. The combined network infrastructure will cover 12 million points of presence in the Southeastern United States and the Midwest, including Atlanta, Charlotte, Chicago, Detroit and St. Louis.

“By leveraging our joint operating expertise and the Sprint brand, we believe there is significant potential for additional subscriber growth and market penetration in our combined territory,” says Tom Dougherty, AirGate president and CEO.

With a territory that covers 62,000 contiguous square miles in the Southeast, public company AirGate PCS is one of the largest Sprint PCS affiliates with a completed PCS network.

iPCS serves a population of about 7.4 million in 37 markets in Illinois, Iowa, Michigan and eastern Nebraska. iPCS is completing its network build-out by the end of the year. Its territory includes the headquarters of large companies such as State Farm Insurance, Archer Daniels Midland, Dow Chemical, John Deere and Caterpillar and about 90 colleges and universities.

The transaction is worth about $803 million in equity, based on AirGate’s Aug. 28 closing stock price, when the deal was struck. The tax-free, stock-for-stock transaction for 13.5 million shares of AirGate common stock includes 1.1 million shares reserved for issuance upon the exercise of outstanding iPCS options and warrants. AirGate also will asume about $97 million of iPCS net debt.