A Strange Way to Start Monday

Peter : On Rad's Radar?
| Peter Radizeski of RAD-INFO, Inc. talking telecom, Cloud, VoIP, CLEC, and The Channel.

A Strange Way to Start Monday

The party might be over at the PAETEC, as they announced today an $891M stock only sale to WINDSTREAM. USLEC, AllWorx, CavTel, McLeodUSA, Quagga, Xeta, US Energy Partners - all acquired by PAETEC to create a billion dollar CLEC. As if hitting the billion dollar mark was meaningful. Intermedia was the first billion dollar CLEC and HAD to sell itslef to MCI, as short-term debt became due. ($1B in rev; $3B in debt.)

It shouldn't be about the revenue number. It should be about the Strategy, Execution and margin.

I remember when Paetec bought Allworx. My reaction was that running a public company was a different ball game from running a private one. I wondered even then what the strategy was. I still don't know.

All that unused fiber (from MacLeodUSA and CavTel). The owners of the VAR's - of Quagga, XETA and USEP - who now have to feel slighted - are probably asking themselves the same thing that I am: WTH???

But if you look at the acquisitions being all over the map - and that Arunas was in India recently, where he was rumored to be trying to sell to Tata - then you have to figure the runway ran out on Wall Street for Paetec. By that I mean that organic growth just was not happening.

With everything that is going on in the economy and our industry, sustaining growth is almost impossible. Revenues can not go up when prices are dropping. (This is why the cellcos are going metered -- it's the only way to bring in much needed revenue in a flat market.)

In the Channel, Master Agents are buying VAR's. Why? To get to a vertical, to add a sales force, to grow - at a time when the traditional channel is stalling. Agents can't really make a living selling just $380 T1's. And the quotas keep going up, while prices either decline or remain flat. Broadband, wireline, cellular, TV - it's all flat markets.

  • Internet bandwidth is growing.
  • Replacing WAN's with MPLS is an option, especially for that Converged Network effect.(But it's replacement rev.)
  • SIP Trunking is just replacing PRI's (at a lower rate).
  • Regular flavored VoIP is replacing POTS.
  • Hosted PBX is coming out of the gate to replace PRI+PBX.
  • Hosted UC and Cloud - when we figure it out.

There hasn't been much innovation in telecommunications. VDSL2 was probably the last of it. The only broadband growth is in the rural market with some form of FTTx and Fixed Wireless. M&A is the only avenue - or watch your stock tumble and your ability to get credit get more expensive.

Why Paetec and not XO for Windstream? Two reasons. It takes one of Windstream's competitors out of the market and Icahn would want cash for XO, not all stock like this deal. Windstream gets the $1.4B in Paetec debt to re-fi. If you read this blog post, it's all about the Street.

They will have over 100,000 route miles of fiber that will still be under-utilized. There will be massive layoffs. The integration will be a challenge. And the Channel? No one knows, but both companies had an Agent appreciated Channel, so we will see.

This is a rather large CLEC-ILEC deal, but the Nuvox-Windstream deal went pretty smoothly. WIND has come a long way from combining with Valor when the wireline was spun out of Alltel in 2006.

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