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Vonage Raises Another $250M

VOIP pioneer Vonage Holdings Corp. (NYSE: VG) has raised $250 million in convertible debt funding -- a move that is likely to be its last major financing before it goes public or is acquired.

This latest financing was led by affiliates of Bain Capital , with Vonage's existing investors -- including New Enterprise Associates (NEA) and Meritech Capital Partners -- chipping in as well. The debt funding brings Vonage's total of funding raised to date all the way to $658 million. That's even more than Zhone raised during the Internet bubble.

In a statement this morning, Vonage said its latest funding round will be used to build out its network across the United States and to continue its deployment of Enhanced 911. Vonage's own brass chipped in for the investment as well, the company says.

The funding was first reported in the Wall Street Journal over the weekend.

Vonage's previous round was $200 million in May 2005. (See Vonage Raises Another $200M.)

Vonage, which provides a voice service to broadband users, has been exploring various exit strategies this year as competition intensifies in the IP telephony market, with BellSouth Corp. (NYSE: BLS) the latest big name to enter the fray. (See Vonage Selects IPO Bankers, Sources: Vonage Is Eyeing the Exits, Microsoft Buys Skype Rival, BellSouth Launches Residential VOIP, and Google Talks the Talk.)

And there certainly appears to be an appetite among investors for Vonage. The VOIP service provider's CEO, Jeffrey Citron, told the WSJ that his company had been looking for $155 million in new funding, but the level of interest in the offer was strong enough to warrant the higher amount.

Vonage is believed to have already turned down one bid of around $1.5 billion, with BellSouth and Sprint Corp. (NYSE: S) identified as potentially interested parties. (See Vonage Hearing Buy-Out Bids.)

If Vonage is ultimately acquired, it wouldn't be the first big VOIP name to find a new home: Earlier this year Skype Ltd. was bought for $2.6 billion by eBay Inc. (Nasdaq: EBAY). (See EBay Buys Skype for $2.6B.)

Vonage has more than 1 million subscribers, a milestone reached in September this year. Its basic service, which allows unlimited calls to anywhere in North America, is $24.99 per month. (See Vonage Exceeds One Mil .)

— Ray Le Maistre, International News Editor, Light Reading

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materialgirl 12/5/2012 | 2:49:41 AM
re: Vonage Raises Another $250M For Vontage to be raising this form of capital at its stage of maturity (proably not cash-flow positive) is scary. It is like lighting a fuse to a bomb, as they now MUST be quite cash flow positive before they chew through another $200M.

It makes an IPO less tasteful to investors unless they raise enough to pay everything off and have more left over to fund growth. This is the type of capital structure that killed off the contenders during the bubble.
HeavyDuty 12/5/2012 | 2:49:40 AM
re: Vonage Raises Another $250M "You really think a group is going to invest $250M in a late stage startup without seeing a good cash flow story?"

Oh yeah! It's the definition of bubble (see also, dot.bomb, etc...). Besides, it has come to pass (many times) that said, "good cash flow story," turns out to be completely fiction.
ragho 12/5/2012 | 2:49:40 AM
re: Vonage Raises Another $250M
I see more scary things in what you said.

...at its stage of maturity (proably not cash-flow positive...

You really think a group is going to invest $250M in a late stage startup without seeing a good cash flow story?

On the other hand, I see good news for Vonage (I am not affiliated or otherwise related to Vonage).

First, the issue is convertible debt--participated in by existing holders. This means that they really see the light, that an exit is coming.

Second, this is debt financing and not equity. This means that if there is an IPO, the offered stake will be solid without being too liquid (the terms are probably such that the convertibles are not exercisable immediately after going public).

Last, dot-bomb companies didn't carry a lot of debt financing (contrary to your statement). If they had, and VCs had actually done their due diligence, then they'd have realized they were going after a pie in the sky.

My personal opinion is that this debt financing makes Vonage look good, because it's like bankers investing in a cow. You don't see many bankers taking in startup bonds, do you? :-)

-ragho
optiplayer 12/5/2012 | 2:49:35 AM
re: Vonage Raises Another $250M I have to agree with Ragho, if you have to raise money this is a great way to do it at this late stage and the fact that it is convertible means the new investors view that there is plenty of upside. Not to mention the new investor is Bain, these guys are about the best - they don't lose money very often.

I further have to agree with Ragho that this type of funding was not typical of the bubble, contrary to MG's assertion. I can think of only one company that did debt financing in the later stages of the bubble and that was Cyras. I'm sure there were others but I can't recall them.
dljvjbsl 12/5/2012 | 2:49:34 AM
re: Vonage Raises Another $250M if you have to raise money this is a great way to do it at this late stage and the fact that it is convertible means the new investors view that there is plenty of upside.

What about the issue that the convertability is good fro teh new investors but bad for the existing ones? If the new investors see plenty of upside then why did they ask for and get the protection of convertability. They could have received more shares if they went the pure common share route.

Convertibility usally means the opposite. The new investors see a significant downside risk and have enough leverage to require convertibility. This is not unalloyed good news for the exisitng shareholders.
materialgirl 12/5/2012 | 2:49:34 AM
re: Vonage Raises Another $250M The companies that used debt were service providers, not box vendors. You do not hear much about WCOM or GX any more. The debt killed them.
ragho 12/5/2012 | 2:49:33 AM
re: Vonage Raises Another $250M
You make an interesting point, but those days are gone. Convertability used to be a leverage item but convertible debentures (or any others, like warrants) are normal instruments these days.

Generally though, convertibles are not agreed to by investors if the company is not a well-going concern. If a company wants more liquidity, and the investor wants a guaranteed return, it ends up being a win-win situation for both.

A close example that I can cite is that of Level3, debt financed by Berkshire Hathway for $500m and then exited within a year. Level3 got working capital, Warren Buffett made off with bond-quality returns.

-ragho
optiplayer 12/5/2012 | 2:49:33 AM
re: Vonage Raises Another $250M The story says the existing investors participated in the new round as well.

"If the new investors see plenty of upside then why did they ask for and get the protection of convertability."

Could be that Vonage dictated debt/convertibility to minimize dilution. Or, Bain is looking for downside protection as you said or perhaps some of both. Maybe this was best for both sides.

Why doesn't Vonage just go public? I would think that its value would likely never be higher after the Ebay-Skype deal.
optiplayer 12/5/2012 | 2:49:33 AM
re: Vonage Raises Another $250M Good point. However, it was not debt that killed WCOM as much as fraud and some pretty lousy DD.

GX is a different story, I'll give you that one.

paolo.franzoi 12/5/2012 | 2:49:31 AM
re: Vonage Raises Another $250M
opti,

I always wrote the Skype deal to drugs. If you do a financial analysis, Skype is worth $0.00. I am not sure how E-bay got a valuation assessment to show that they were not overpaying, but hey that is what paying Bankers is all about.

That is what Vonage fears. If it is valued by what the bottom line actually says, then it is worth squat at the moment.

seven
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