PAETEC to Pick up Fiber and Central Office Colos with Cavalier Telephone Bid

Event Summary

September 13, 2010 – PAETEC plans to acquire Cavalier Telephone in $460 million cash transaction. The acquisition stands to increase PAETEC's route-miles to 37,023 total (metro, middle-mile and long-haul), and to increase its central office colocations to 1,178 total. PAETEC will be able to use Cavalier Telephone's eastern U.S. infrastructure to reduce its own costs delivering services to customers in the region. The acquisition, expected to complete in the next four to six months, firms up PAETEC's lead as the nation's largest CLEC revenue-wise, generating $1.95 billion in annual revenues across 86 of the top 100 MSAs.

Quick Take

Analytical Summary

• Current Perspective: Positive on PAETEC’s move to acquire Cavalier Telephone, because the carrier gains 574 colocations and middle-mile, long-haul and metro fiber across the eastern U.S. where PAETEC has most of its customers. These assets should help PAETEC lower its costs, and the carrier could focus on on-boarding customers in locations reached directly by its central office colocations. PAETEC already had been one of Cavalier Telephone's largest fiber customers. Unlike past acquisitions, however, this purchase may require large workforce reductions after the acquisition is complete.

• Vendor Importance: High to PAETEC, because the carrier has some major opportunities to control and reduce its costs by (a) moving leased circuits from Special Access to on-net UNE-L access arrangements; (b) reducing enhanced extended loops (EELs) via acquired middle-mile fiber that traverses colocated central offices; and (c) extending nearby Cavalier Telephone fiber to buildings served by PAETEC, to reduce resale of optical access services. PAETEC has shown deft integration in its past series of acquisitions, and will need to do so again with Cavalier.

• Market Impact: High on competitors serving SMB and enterprise customers, because PAETEC can tap higher-end service opportunities now that it is a substantial optical infrastructure owner. PAETEC may decide to step up its focus along east coast metros where it now has colocations and/or its own metro fiber infrastructure, meaning that it may choose not to increase its sales efforts in markets where it mainly relies on Special Access.

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