Paetec buys McLeodUSA
The WSJ reporting;
Paetec Holding Corp. last night sealed a deal to purchase telecom provider McLeodUSA for $492 million, marking the end of independence for one of the leading lights of the dot-com boom.
Under the terms of the deal, Fairport, N.Y.-based Paetec will swap 1.3 of its shares for each McLeod share, which is privately held after a crippling debt load sent it through a series of bankruptcy proceedings. Paetec will be issuing 40 million shares to pay for the transaction, while also taking on $65 million of McLeod's net debt. McLeod is based in Cedar Rapids, Iowa.
The combination will create one of the largest rivals to AT&T Inc. and Verizon Communications for business-telephony services. For the 12 months ended June 30, Paetec and McLeod reported combined revenue of $1.6 billion. The deal should eventually create annual cost savings of $30 million, the companies said.
Such combinations have become increasingly important as both Verizon and AT&T have become ever larger through acquisitions of their own. "The consolidation of the larger carriers has strengthened our position," said Paetec Chief Executive Arunas A. Chesonis. "They feel they don't have any choices."
After the deal is completed, Paetec is expected to have 3.4 million access lines. It will also have 17,000 miles of fiber-optic routes, used to connect cities including Dallas, Houston and Seattle.
With credit markets in turmoil, overall merger-and-acquisition activity has slowed. But the exit of other investors has created an opportunity for corporations, which can use their own securities in stock-swap transactions such as that in the Paetec-McLeod deal.
The structure should also help improve Paetec's debt ratios, from 3.9 times its debt to adjusted cash flow to 2.9 times.
The deal is a humbling end for McLeod, which was valued at $670 million in January 2004, when investors bid up the stocks of companies building up fiber-optic capacity. But a glut of capacity and competitors made the business difficult to sustain. Dozens of competitive phone companies went out of business or had to find consolidation partners. Paetec emerged as one of the survivors.
Paetec shares were up 33 cents, or 2.8%, to $12.13 Friday in 4 p.m. Nasdaq Stock Market composite trading. The shares are up 32% since Jan. 3.
