Birch Buys Cbeyond

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

Birch Buys Cbeyond

I knew Cbeyond was looking to sell (like TWCable, "Someone buy me!"). And there was the big rumor about Megapath buying them. The execs at Cbeyond were on the losing end of the Paetec-Windstream deal. And while Cbeyond has been talking a good game about Cbeyond 2.0, it is extremely tough to make this transition and sell enough cloud to make up for T1 sales. ARPU on cloud is about one-third of T1 sales; so for every T1 deal that expires (and doesn't renew), you have to sell 3 cloud deals. That is a tough row to hoe.

This marks Birch's 21st acquisition since emerging from its second bankruptcy in 2006. It received a $500 million line of credit last year which it leveraged to buy Ernest and Lightyear.

Many people are saying this is very complimentary. Let's look at this all cash $323 million deal.

This isn't an asset sale like Lightyear. Even Ernest was an asset purchase. previous deals were about customer base and adding revenue.

Ernest was a telecom reseller like Birch, which started as a UNE-P shop before its first BK. It moved to wholesale agreements with the expiration of UNE-P. Then Birch started buying up telecom assets from bankruptcy (BK) court.

Birch was already national, but with a focus in the Southeast where many of its acquisitions occurred. (Plus it started as a BellSouth UNE-P house). Lightyear was a BellSouth reseller as well. However, Lightyear had deals with Sprint and other carriers to give it a nationwide footprint. Ernest also had a nationwide footprint. Cbeyond just fills that it and makes it dense in some parts.

Cbeyond adds T1 customers but also higher ARPU business customers as well as a suite of cloud services. It will be interesting to see what happens to Cbeyond 2.0, since the Birch sales teams are used to pushing orders for DSL, POTS and T1 - even Residential!!

I keep seeing this - 'Creates a nationwide IP-based network with approximately 10,000 fiber route miles, over 500 fiber-lit buildings, 570 collocations and 5 data centers." What fiber route miles do they own? And when you say 500 fiber lit buildings, is that fiber you own or just where your customers are or what?

Birch must be doing about $130 million in revenue (after 19 acquisitions and 2 BK's) to make the combined entity $700 million. The challenge is to execute on a strategy when your company doubles in size but has revenues primarily from a declining asset called wireline.

Birch will have the same issue that Cbeyond and to a lesser extent EarthLink and Windstream faced --- how do you get your sales force to sell higher margin services after years of taking orders for replacement telecom by "saving them money"?

In the face of the TDM-to-IP transition the new entity - CBirch - will be interesting to watch.

Birch also grabbed some assets in Nebraska with its acquisition of SelecTel.

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