SureWest Sells for Premium Price of $341 Million

Consolidated Holdings Gains 65,000 Subs in K.C., Sacramento in Deal for Property Google Eyed

By Mike Farrell -- Multichannel News, 2/13/2012 12:01:00 AM

Independent telecom provider Consolidated Holdings made a big push into video last week, after agreeing to buy SureWest Communications for about $341 million, a move that will triple its video customers.

Consolidated has about 33,000 Internet-protocol video customers in Illinois, Pennsylvania and Texas. The addition of SureWest brings about 65,000 additional video customers (and 130,000 total subscribers) in Kansas City and Sacramento, Calif., into Consolidated’s fold.

The purchase price was a hefty premium for SureWest — the $23 per share offer was 47% above SureWest closing price of $15.59 on Feb. 3 — perhaps paid in part to ward off competing bidders.

Some analysts had speculated that Google would snap up SureWest. The online search giant has been building an experimental fiber-optic 1 Gigabit-persecond high-speed data network in Kansas City, Kan., and Kansas City, Mo. — SureWest’s backyard — for about two years. But Google has had trouble grabbing rights to use existing utility poles in the cities, a development that would have made SureWest an attractive target.

Drexel Hamilton analyst Barry Sine had earlier speculated that Google was eyeing a deal. “We see two potential positives for SureWest,” Sine wrote in January. “It could either be acquired by Google, as Google did with Motorola Mobility, or it could become a tenant on Google’s network using it as an inexpensive way to significantly expand its footprint.”

On a conference call to discuss the deal, Consolidated CEO Bob Currey noted that Google has been in the Sacramento market for about two years and has yet to offer any semblance of service.

“Google has done nothing,” Currey said on the call. “There is no overlap with SureWest’s operating territory. We think there is some opportunity there for us to provide some service to Google if and when they decide to move on that territory.”

Stock in SureWest rose 45.4% ($7.08 per share) to $22.67 last Monday after the deal was announced.

Consolidated shares were down slightly (1.4% or 27 cents each) to $18.98 each on Feb. 6.

The deal seems to be another in what has been a series of smart moves for SureWest over the years. The ILEC expanded into the Sacramento market in 2003, snapping up a state-of-the-art fiber-optic network in the city that had been built by bankrupt overbuilder WINFirst for a bargain- basement price of $12 million. WINFirst had reportedly spent more than $200 million to build out Sacramento before it ran out of cash.

For Consolidated, the deal gives them a strong presence in new markets — Kansas City and California — significantly bolsters its triple-play capacity and furthers its stated plan to move toward less regulated higher gro wth services.

For the nine months ended Sept. 30, Consolidated’s total revenue was down 3% to $280.6 million and adjusted cash flow rose 1% to $141.2 million. At SureWest, total revenue rose 1% to $184.5 million for the first nine months of the year, while net income fell 77% to $319,000. But perhaps most telling was where the bulk of that revenue came from. SureWest generated $139.4 million in broadband revenue (up 8% for the period) and $45.2 million from telecom services (down 14% for the period.)

The combined companies will have operations in six states and about 1,775 employees.

The merger is subject to standard closing conditions including federal and state regulatory approvals and the approval by both Consolidated and SureWest shareholders.

Wells Fargo Securities, LLC and Morgan Stanley acted as financial advisers to Consolidated on the transaction and Schiff Hardin LLP served as legal adviser. UBS Investment Bank acted as financial advisor to SureWest and Orrick, Herrington & Sutcliffe LLP acted as legal adviser.

Morgan Stanley Senior Funding Inc. has provided Consolidated with $350 million of committed debt financing in conjunction with the acquisition. These funds will be used to refinance the debt of SureWest and pay for the cash portion of the purchase price.