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Covad Goes Platinum

Raymond McConville
News Analysis
Raymond McConville
10/29/2007

Covad Communications Inc. announced this weekend that it's agreed to be bought by private equity firm Platinum Equity LLC for $304 million, or $1.02 per share. (See Covad Accepts Buyout.)

The acquisition price is a 59 percent premium on the stock's closing price of 64 cents on Friday. Shares of Covad were up 28 cents (43.7%) to 92 cents in late afternoon trading today.

A telecom service provider being taken private for an enormous premium is nothing new. BCE Inc. (Bell Canada) (NYSE/Toronto: BCE) is in the process of finalizing the Ontario Teachers Pension Plan's deal to take it private for better than a 40 percent premium.

In Covad's case, however, the deal might be less expensive than it appears.

"The price isn't at all excessive," says Stanford Financial Group analyst Clayton Moran. He argues that Covad's stock has been depressed lately because of concerns that the company wouldn't be able to refinance a convertible debt of $125 million.

"When you consider where the stock was trading not too long ago, it's not too high of a premium," Moran says. Shares of Covad were above the 90 cent mark as recently as Aug. 10.

Putting the price tag aside, the reasoning behind an acquisition of Covad by a private equity firm is not immediately obvious. Covad has a large broadband footprint, but these days it faces competition from numerous alternatives for getting voice and data services.

"It is kind of unusual to have sort of a nationwide network for broadband that isn't associated with one of the large carriers," says Moran. "But Platinum does own a few resellers, so there could be some synergies in their portfolio."

Covad had been involved in a few acquisition rumors in recent months. Names like Sprint Corp. (NYSE: S) and AT&T Inc. (NYSE: T) had been tossed around, along with a surprising candidate in Best Buy. (See Strange M&A.)

— Raymond McConville, Reporter, Light Reading

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