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What is Fueling the CLEC Market – part 3 December 31, 2010

Posted by TelUS Consulting Services in CLEC catagory.

As discussed earlier, the past year has been one of heavy consolidation for US-based competitive local exchange carriers (CLECs), but underlying the need to gain scale through acquisition are a few other prominent trends, according to industry experts.

An Energized Economy?

The availability of capital plays a big part in the volume of  M&A activity and this year’s high volume of CLEC M&A shows the money is there for the perceived “right” deal.

M&A activity indicates a strengthening of this market, not only is the capital available but that one company values another company because of the way it has done business or the customers it has acquired.

In general it would appear that we are starting to see economic stabilization, we have seen the floor in terms of where we are going financially, now the market feels it has valid financial models to see what a CLEC is worth, what an attractive model is, and whether they are able to secure the financial backing, so that their own business model isn’t put at risk.  Let’s face it, a year or so ago, there wouldn’t be any banks or other financiers that were willing to procure $100 million to $200 million for one of these deals.

So what’s next on the CLEC M&A front?  Industry experts are looking at One Communications as the next CLEC in play however no one  is expecting 2011 to be a replay of this year, in terms of M&A volume. I have heard people in the venture capital space say this year seems to represent the peak for this kind of activity so it would appear 2011 will be an M&A slow down to see exactly where the remaining players are and what they can produce.

As many of you know, I have been in the CLEC industry since its inception. Having owned and sold two CLEC’s of my own, I have long agreed with many industry insiders that the classic CLEC model was flawed from the start.  Thankfully time, and the market, have weeded out many wanna be’s and now the small number of these carriers that have survived are well-managed.  There are a few remaining UNE-P based CLEC’s with very small switching foot prints and no fiber backbone network that constantly need to keep acquiring companies is in order to keep their revenues up. I see those companies falling by the wayside in the next two years as cloud computing and fiber bandwidth demands put a squeeze on their revenues. The play in the industry appears to be the larger, better funded and better managed CLEC plays. Keep an eye out as the Windstream’s of the world begin to look at merging to form super-CLEC’s.

Joe Buck, N.C.E.

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