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Super CLEC PAETEC snaps up Cavalier September 16, 2010

Posted by TelUS Consulting Services in CLEC catagory.

PAETEC Holding Corp. will become a nearly $2 billion-per-year CLEC with the acquisition of fiber services provider Cavalier Telephone Corp.

Buying Cavalier, based in Richmond, Va., pushes PAETEC from about $1.58 billion in annual revenue to $1.95 billion, executives said on Monday, when the deal was announced. PAETEC will pay $460 million in cash and, in return, own valuable assets including Cavalier’s Intellifiber Networks division.

The fiber holdings – which were priced lower than normal due to the still-struggling economy – are key for PAETEC, as metro and long-haul bandwidth consumption fuel demand for fiber transport (Cavalier doesn’t offer wireless backhaul). PAETEC will boast 10,609 metro fiber-route miles and 37,023 total fiber-route miles when the deal closes. Plus, Cavalier’s networks complement PAETEC’s existing routes and expand some. That will translate into less reliance on Bell networks, and give PAETEC negotiating leverage for better special access rates from Verizon Communications Inc.

In addition, the PAETEC-Cavalier transaction gives business customers greater assurance.

Indeed, PAETEC embodies the new “super CLEC” breed, as one of the challengers to the incumbents that records billions of dollars in sales each year. And PAETEC’s strategy goes beyond the enterprise: The Rochester, N.Y.-headquartered company has expanded into the energy, software and data center markets.

For now, though, PAETEC remains focused on closing the Cavalier deal. Shareholder approval wasn’t required for this takeover, so now it’s up to regulatory authorities to give their blessing. Chesonis expects that to happen to within four to six months, with integration of Cavalier completed soon.

“I think this will be two years because we have overlay everywhere,” Chesonis said.

Why Intellifiber?

Intellifiber earlier this summer was one of several carriers on the auction block as interest in the fiber sector boiled over. At first, PAETEC considered buying just Intelliber, but then realized it would be more advantageous to buy all of Cavalier’s operations — enterprise, fiber and even residential. Cavalier had paid for top-dollar fiber assets at pennies-on-the-dollar prices and PAETEC would only benefit from that. Thus, PAETEC is snapping up Cavalier from private equity firm M/C Venture Partners, a well-known investor in the tech space — M/C owns part of fiber operator Zayo, for example.

“Cavalier’s fiber infrastructure, network assets and corporate culture make it a perfect match for PAETEC and dramatically strengthen the company in the eastern United States,” Chesonis said in a prepared statement.

Chesonis will remain CEO of the combined company, while Cavalier President and CEO Danny Bottoms will head PAETEC’s fiber unit. That division includes people and properties from PAETEC and its previous acquisitions, including McLeodUSA. Bottoms will expand PAETEC’s territory past the Northeast, Texas and the Midwest, Chesonis said.

As for other acquisitions, PAETEC is keeping its eyes open for more opportunities. And might that include One Communications, which is seeking a buyer?

“I think we’d consider all CLECs and fiber companies” as long as value, cost synergies, integration risks and business strategies all fit with PAETEC’s requirements, said Chesonis.

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