Cbeyond Sale to Birch Communications Positive Outcome for Shareholders

On Monday before the market open, CBeyond announced that it reached an agreement to be acquired by private telecom provider Birch Communications for $323 million in cash, or about $10 per share. The valuation represents 4.9 times our 2014 EBITDA estimate, a significant discount to facilities-based carriers Cogent and tw telecom that is rationalized by how Cbeyond did not own its own last-mile network assets and was struggling operationally.

Cbeyond on its third-quarter earnings call in November indicated that it formed a special committee on its board to explore strategic options, as it faced mounting churn and declining revenue. On its most recent fourth-quarter earnings call, the company indicated that it hired investment bank UBS to further that goal. For 2014, we forecast revenue of $424.0 million, an annual decline of 8.5%, and EBITDA of $58.2 million, an annual decline of 26%.

Birch is projected to achieve roughly $260 million in sales for 2014, bringing the combined company to a $700 million annual revenue run-rate. The acquisition of CBEY is the latest example of Internet infrastructure consolidation, which has benefited providers such as Cogent and Level 3 (LVLT $38.27).


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