M/C's Role in Fiber Infrastructure: Construction, Restructuring and Consolidation of Broadband Assets to Address Market Conditions
From M/C Partners' initial investment in Brooks Fiber in 1993 to the current day, the firm has acted upon its view that advanced telecommunications infrastructure — which today means broadband and high-speed services—are driving factors for telecommunications industry growth. The basis for this thesis has never been more apparent than it is today. With video and other Internet applications driving rapidly growing bandwidth requirements for customers of all types, access to bandwidth is as important to consumers and businesses as phone service and electricity are.
M/C has proactively adapted its strategy throughout the industry's evolution. The result is experience and success in the construction, restructuring and consolidation of broadband assets to address market conditions and maximize asset profitability and shareholder value.
Construction with Brooks Fiber in 1993 and Cavalier in 1999
In late 1993, Brooks Fiber entered the competitive access business. The company raised $41 million in equity capital from venture capital firms specializing in telecommunications, including M/C Partners (M/C II), the largest founding investor with an investment of $12.4 million.
M/C and Brooks Fiber agreed that a facilities-based approach was the best way to control the economics. Companies reselling an incumbent local exchange carrier's (LEC) services might offer customers a five percent discount on services purchased wholesale at a twenty percent discount. In contrast, a CLEC with its own network could make a gross margin of seventy percent or higher. Without owning its own facilities, a company could neither maximize profitability nor sell based on reliability.
In a little over a year, Brooks Fiber purchased or began construction on fiber networks in nine small to medium-sized cities. The networks gave businesses an alternative to local telephone companies for transmitting data, video or long-distance calls, and enabled critical backup services for banks and other companies that depend on uninterrupted data transmission.
In May of 1996, with networks operational or under construction in 44 U.S. cities, Brooks Fiber held an initial public offering (IPO). In January 1998, WorldCom completed a $2.9 billion purchase of Brooks Fiber, adding 34 cities to the 52 markets where WorldCom already offered alternative local phone services.
In 1999, M/C Partners was instrumental in the inception and funding of Cavalier Telephone with Brad Evans, a serial M/C portfolio entrepreneur. The company initially built fiber in its core markets in Norfolk, Richmond and Northern Virginia. With significant subsequent capital investments, Cavalier built one of the largest fiber optic networks on the East Coast.
The company's strategy was to use its own facilities and control its telephone infrastructure up to the last mile to bring new and innovative services to its customers at considerable savings. Due to its proprietary infrastructure, Cavalier offered residential services at a substantial savings to the incumbent operator's product set.
Restructuring with Cavalier/Elantic in 2004 and ICG in 2004
When the market turned at the end of 2000, M/C provided the financial resources that enabled Cavalier to aggressively consolidate distressed assets. The significant incremental capital M/C committed as well as its active involvement in the negotiation of complex acquisitions have been central factors in Cavalier's success.
In May of 2004, M/C played a key role in Elantic's acquisition of the stock of Dominion Telecom for $1 million. This acquisition added 16,800 route miles of fiber assets, constructed by Dominion Telecom at a cost of approximately $1.3 billion, to the Elantic network.
Late that year, Cavalier acquired additional fiber facilities in Philadelphia and Cleveland through its purchase of sister company City Signal. By 2006, Cavalier Fiber was driving revenue on its extensive network of 3,000 route miles of metro fiber and 8,000 intercity route miles, connecting dense metro markets up and down the eastern seaboard.
In January of 2006, Cavalier Telephone completed the acquisition of Elantic.
The combination of Elantic's fiber assets with Cavalier's fiber network, which had metropolitan fiber rings in major cities throughout the Mid-Atlantic area, enabled the company to expand its retail presence by allowing more local and long distance, voice and data traffic to travel “on-net”. As a result, Cavalier can more efficiently sell new products, such as gigabit Ethernet and optical wavelength, to large enterprises. M/C's total investment in Cavalier/Elantic is approximately $70 million to date.
During the CLEC industry collapse in 2001-2003, M/C made a strategic decision to invest in the CLEC sector as it believed that certain companies were undervalued and offered tremendous opportunity. M/C saw ICG Communications as an attractive investment target. ICG was an early pioneer in the competitive telecom market but had already gone through the Chapter 11 process in the early 2000s. Despite a restructuring of its debt, the company was facing another bankruptcy in 2004. In July, the company announced a definitive merger agreement with MCCC ICG Holdings LLC (“MCCC”), a joint venture between Columbia Capital and M/C Partners. MCCC assumed management of all day to day ICG operations. M/C worked with it outside of the protection of bankruptcy—which enabled it to control the asset— to reduce its operating costs, turning around an $8 million monthly operating loss to a $1.5 million of positive monthly cash flow within 9 months. MCCC ICG Holdings paid $6 million for the asset and funded $12 million in operational expenses.
ICG benefited both from the investment and M/C's industry expertise. ICG's new strategy involved the sale of more than five different market clusters/business units. M/C helped to identify a number of the parties with whom the group negotiated its divestitures, especially the first sale of the California markets to Mpower Communications. This enabled ICG to focus on its remaining markets and its customers to benefit from having a financially strong and geographically focused service provider.
On May 31, 2006, Level 3 Communications, Inc. (Nasdaq: LVLT) announced that it had completed its acquisition of all of the stock of ICG Communications, Inc., a privately held Colorado-based telecommunications company. Level 3 paid total consideration of $175 million in cash and stock. With these proceeds, in combination with the prior asset sales, M/C realized a sizable return on its investment in approximately two years.
Leading the Current Fiber Trend with Zayo and Lightower in 2006
Launched in 2006, Zayo Group consists of three complementary business units, Zayo Bandwidth, Zayo Managed Services and Onvoy Voice Services. Each has a core competency and focus in a specific area of bandwidth, voice and enterprise fiber network services.
Zayo provides its services over a fiber network that spans more than 19,000 fiber route miles in 129 markets across 23 states. The regional telecom service provider's customers include carrier, enterprise, SME and government customers. Zayo's product set includes private line, Ethernet, wavelength, Internet, SS7, long distance, tandem switching, Operator Services, TDM voice, VoIP, video-conferencing, web hosting, and more.
Since May of 2007, Zayo has completed acquisitions of eleven businesses, including
NTI, Citynet Fiber Network, Memphis Networx, PPL Telcom, Indiana Fiber Works,
Onvoy, VoicePipe, Columbia Fiber Solutions, 5 CenturyTel CLEC markets, select fiber assets from Citynet's retail group and a conduit system from the Adesta Secured
Creditor Trust. A majority of these entities provided fiber-based bandwidth. Some entities also provided managed telecom services and/or operated carrier grade voice networks. Zayo is also in discussions with other entities that own and operate fiber optic networks.
Lightower Fiber LLC
In May 2007, M/C Partners and Wachovia Capital Partners purchased National Grid Wireless US, a leading wireless and fiber optic infrastructure provider to the communications industry, from National Grid plc. The company operated an extensive communications infrastructure portfolio consisting of approximately 350 communications towers and over 1,100 route miles of dark fiber. The company changed its name to Lightower subsequent to the purchase.
In March of 2007, Lightower Fiber, a division of Lightower, acquired DataNet Communications Group and KeySpan Communications Corp. adding 2,600 route miles of fiber to reach key routes in New York, New Jersey and Connecticut.
In March of 2008 the company split into two different entities: Lightower Wireless LLC and Lightower Fiber LLC. Rob Shanahan, co-founder and former CEO of Conversent Communications, became CEO of Lightower Fiber LLC.
Lightower Fiber LLC is the leading digital fiber network and broadband service provider in the Northeast, offering more than 3,600 route miles coupled with comprehensive backhaul services. Lightower Fiber's geographic footprint extends from southern New Hampshire to Massachusetts and Rhode Island, to eastern New York State, southern Connecticut and New Jersey. The company's investors and management see excellent opportunities to grow Lightower Fiber's network by further solidifying its footprint in the Northeast through additional acquisitions and strategic alliances.