SureWest Sells for Premium Price of $341 Million

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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

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

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

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

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.