ILEC Buys CLEC

In a move that has some scratching their heads, Windstream (formerly Alltel) bought Nuvox (formerly FDN and NewSouth). The price: $643 million (mainly stock) for 90,000 customers - that's $7100 per customer (or $198 per month per customer for 36 months).

This isn't a new adventure for Windstream. When they bought CTC, they acquired some CLEC assets. Windstream may be thinking that it isn't likely to increase revenue within its footprint, so go B2B as a CLEC to take some revenue from Ma Bell.

From the WSJ: "For privately held NuVox, Windstream will pay $280 million in cash, issue $183 million in stock and assume $180 million in debt. The company plans to use its existing cash and tap its revolving credit line to fund the deal."

WHY?

My best guess: Windstream and other ILECs have declining revenue and increased competition from MSO's. So by buying a CLEC outside its region, it gets access to Business customers and a new revenue stream. It couldn't buy cellular spectrum and build out for $643M. Phone+ says that it wanted access to the Channel program.

The Channel

Nuvox sells underwater and pays out 12-18%. More than its margins really. (Explains how debt went from $78M to $180M). So either pricing has to go up or agents get paid less - or both. Either way agents are going to take a beating. And probably so are the customers since pricing can't remain that low for long. Why?

The Fairpoint Effect.

Fairpoint filed bankruptcy less than 2 years after taking over VZ's rural landline business in New England. It wants to reneg on merger conditions and shave off more than $1B in debt. This will make it harder for other ILEC's to get debt financing for mergers, expansion, upgrades, fiber, payroll and benefits. (Frontier must be sweating.)