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Paetec to Acquire McLeod for $492M

Paetec Communications Inc. (Nasdaq: PAET) is acquiring Midwest telecom carrier McLeodUSA Inc. (Nasdaq: MCLD) for $492 million. Paetec will also be taking on McLeod's $65 million debt, bringing the total value of the transaction to $557 million. (See Paetec Acquires McLeod.)

Paetec says the acquisition of McLeod now makes it a legitimate competitor to Verizon Communications Inc. (NYSE: VZ) and AT&T Inc. (NYSE: T) in the enterprise market, as Paetec now has a nationwide footprint. The combined companies had revenues of $1.6 billion for the 12 months ended June 30.

Verizon Business, by comparison, had $3.6 billion in revenue this past quarter alone while AT&T's enterprise revenues for the same quarter topped $8 billion.

"We consider AT&T and Verizon as our No. 1 competitor in the marketplace. This deal positions us perfectly to go up against them," says Chris Muller, a spokesman for Paetec.

Verizon and AT&T could not immediately be reached for comment.

Since the deal for McLeod is an all-stock transaction involving no cash, the assumption of McLeod's $65 million in debt does not badly damage the balance sheet, while the company's overall ratio of debt to EBITDA will go down from 3.9x to 2.9x.

Paetec has seen its stock rise 34 percent since the start of 2007, giving the company more flexibility to make acquisitions like this.

The deal comes at a time when McLeod was closing in on its second IPO, with which it hoped raise $100 million. (See McLeod Looks for $100M in IPO.) But the CLEC found that being rescued by Paetec was the better way to go.

"The IPO process was going well, but when Paetec approached with the offer, we saw it as a chance to achieve and magnify the objectives that we had in mind," says Dan Smith, a spokesman for McLeod.

Paetec's chairman and CEO, Arunas Chesonis, will remain in the top spot for the newly formed company. It has not been decided yet what role McLeod CEO Royce Holland will serve.

The transaction is expected to be completed in about four months.

— Raymond McConville, Reporter, Light Reading

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Raymond McConville 12/5/2012 | 3:02:34 PM
re: Paetec to Acquire McLeod for $492M Paetec uses its surging stock to buy an unprofitable company. The two footprints piece together nicely, but was this a good move?
American Indian 12/5/2012 | 3:02:32 PM
re: Paetec to Acquire McLeod for $492M

In addition, before going bankrupt the second time, McLeod management sold off gobs of their fiber to carriers at below market prices.

In other words, Paetec is buying into networks that have very high competition as a result of bad business decisions at McLeod.

The good news, Paetec is FINALLY on metro fiber validating that renting from an ILEC or special access is not a long term strategy.

Given the built in competition factor on every McLeod route, I suggest Paetec paid too much for a T1 IAD base of customers.
deauxfaux 12/5/2012 | 3:02:31 PM
re: Paetec to Acquire McLeod for $492M The indian has called this one right
turing 12/5/2012 | 3:02:30 PM
re: Paetec to Acquire McLeod for $492M Will there be a new name for the combined company?
I always hated the name Paetec - it sounded like some Taiwanese OEM manufacturer. (nothing against OEM manufacturers, but it's not a good brand image for a carrier)

I'm not sure McLeod is much better. Every time I hear it, I keep thinking "There can be only one", or "McLeod, of the clan McLeod".

How about PaeLeod? You could pronounce it either "Pay-loud", or "Payload". Either would work. :)
UberNeoCon 12/5/2012 | 3:02:29 PM
re: Paetec to Acquire McLeod for $492M ....or "impossible for a bankruptcy judge to kill"

American Indian 12/5/2012 | 3:02:29 PM
re: Paetec to Acquire McLeod for $492M
"MCI" is available as a new name ...
Pete Baldwin 12/5/2012 | 3:02:29 PM
re: Paetec to Acquire McLeod for $492M >I'm not sure McLeod is much better. Every time I hear it, I keep thinking "There can be only one",

Oooh. Now, that would be a cool tagline.

It wouldn't be sensible ("Hi, we compete with AT&T and THERE CAN BE ONLY ONE!") but it would be cool.
turing 12/5/2012 | 3:02:28 PM
re: Paetec to Acquire McLeod for $492M all kidding aside though, it'll be Paetec which I agree is almost as exciting as Initech. (any office space fans out there?)

Office space? Never heard of it. Now I have to get back to stapling a cover sheet to my TPS report. You did see that memo, didn't you?
Raymond McConville 12/5/2012 | 3:02:28 PM
re: Paetec to Acquire McLeod for $492M MCI would be cool, but now that they're a bigger company with a bigger footprint, they should have a name that makes them sound bigger. Is Worldcom taken?

all kidding aside though, it'll be Paetec which I agree is almost as exciting as Initech. (any office space fans out there?)
paolo.franzoi 12/5/2012 | 3:02:27 PM
re: Paetec to Acquire McLeod for $492M

I was thinking Peyote.

Anybody who thinks this will work is on it.

seven
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