Case Studies: NuVox Case Study

Snapshot: The story of NuVox, a provider of integrated communications and information technology solutions, illustrates M/C Venture Partners leading role in the telecommunications services sector.  In 1998, M/C sought to back a strong management team with local CLEC operating experience to take advantage of Telecom Act of 1996-related opportunities and, as a result, became the sole initial investor in Florida Digital Network (FDN). In the midst of the CLEC industry downturn in 2001-2002, when many investors walked away from the industry, M/C bought out FDN’s debt for 16 cents on the dollar and assisted with the company’s expansion. Underscoring its understanding of and commitment to the CLEC industry, in March 2003, M/C contributed $15 million to a $62.5 million recapitalization round of NewSouth Communications and assisted with the restructuring of the company’s debt and equity. NewSouth emerged from the financing well- positioned to take advantage of CLEC consolidation. M/C also recognized that the merger of NewSouth and NuVox—two already successful competitive local exchange carriers (CLECs) with complementary customer markets, overlapping geographic targets, and profitable operations—made very good strategic sense, and helped catalyze the merger in 2004. NewSouth CEO Jim Akerhielm took the helm of the merged organization, with more than 40,000 business customers, 600,000 access lines and $300 million in sales. In 2007, FDN was merged into NuVox and M/C became NuVox’s largest shareholder.

In 2010, NuVox was acquired by Windstream Corporation (NYSE: WIN) in a transaction valued at approximately $643 million. Windstream, an S&P 500 company, provides phone, high-speed Internet and high-definition digital TV services to customers in 16 states. Based on their mutual strong performance and the synergies between the two companies, Windstream’s acquisition of NuVox was the logical next chapter in a telecommunications services success story. Even in the challenging economic climate that prevailed at the time, NuVox’s strong track record of increasing margins and growing revenues yielded an excellent liquidity event for shareholders.

M/C partners:

M/C General Partner Peter Claudy served on the board of directors of FDN, representing M/C as the Company’s sole initial investor. General Partner Gillis Cashman joined Peter on the FDN board and later assumed responsibility for representing M/C.  Managing General Partner Jim Wade led M/C’s NewSouth on NuVox’s board.  After the merger of FDN with NuVox, M/C became NuVox’s largest investor. Jim Wade continued as a NuVox director, and was joined on the board by Partner Robert Savignol.

Services, Market Segment:

NuVox provides managed communications and information technology solutions to small and mid-sized business customers in 16 states (Alabama, Arkansas, Florida, Georgia, Illinois, Indiana, Kansas, Kentucky, Louisiana, Mississippi, Missouri, North Carolina, Ohio, Oklahoma, South Carolina, and Tennessee).

M/C investment:

M/C was the sole initial investor in FDN, contributing a $25 million round of equity financing in 1998. M/C made follow-on investments in FDN, bringing its total investment in FDN to $84 million. In 2003, M/C invested $15 million in a $62.5 million round of financing for NewSouth Communications prior to its merger with Nuvox. M/C’s investment in NuVox, including those in FDN and NewSouth Communications, totals $99 million.

Challenges:

Toward the end of 2000, customer spending began to slow, which, coupled with fierce competition, resulted in telecom services revenue growth rates that were far below projections. With the outlook for profits bleak, investors began to pull out of the industry in droves. By 2002, FDN was in default of its bank financing. In addition, by 2003, NewSouth Communications had not reached sufficient operating scale, and had to restructure its balance sheet and raise capital to survive.

M/C Venture Partners recognized that the merger of NuVox and NewSouth—two competitive local exchange carriers (CLECs) with complementary customer markets, overlapping geographic footprints, and profitable operations—made good strategic sense. As with NewSouth in 2003, NuVox was also sub-scale and cash flow-negative, requiring restructuring of its debt as well as an infusion of additional capital, to facilitate a merger.

Metrics:

NuVox is a facilities-based CLEC serving 41 MSAs in 16 contiguous states throughout the Southeastern and Midwestern United States.  The company targets small to medium-sized enterprises (SMEs), offering voice over internet protocol ("VoIP"), local and long-distance voice, broadband internet access, email, voicemail, web hosting, secure electronic data storage and backup, internet security and virtual private networks.

As of December 31, 2007, NuVox had approximately 90,000 customers, 1 million access lines and $535 million in annual pro forma revenue for 2007, with EBITDA of approximately $100 million.

From the CEO:

"M/C has been instrumental in the growth of NuVox. From the early days, they played a very active role in the success of the merger of NewSouth and NuVox and then NuVox and FDN," said NuVox CEO Jim Akerhielm. "And with their help, we have been able to evolve into one of the largest regional CLECs in the Southeast."

From the Founder of FDN and NuVox’s President of Strategic Markets:

"I knew M/C to be a knowledgeable investor with a focus on and expertise in the telecom services segment from working with them at Brooks Fiber," said NuVox President of Strategic Markets and FDN Founder Mike Gallagher.  "They immediately recognized the opportunities for alternative carriers created by the Telecom Act of 1996, and were supportive to FDN not only when the industry was at its peak, but also at its darkest, resulting in a successful merger with Nuvox."

M/C’s Role in the Telecommunications Services Industry:

Given M/C’s focus and experience in the competitive local carrier/telecom space, the firm knew the model well enough to continue to invest throughout the crash, bolstering its portfolio by making distressed acquisitions and helping them to scale. In fact, during the telecom downturn, M/C and its portfolio companies were able to acquire $5 billion of assets for $100 million invested from 2001 to 2004. This included assets that were leveraged to the benefit of existing portfolio companies including FDN, ICG—a new investment at the time—and Cavalier.  M/C’s sector focus and experience with all phases of the investment cycle enabled the firm to use the downtown as an opportunity to help its portfolio companies increase scale by acquiring overlapping networks and driving deeper market penetration—the path to creating value in the telecom sector.

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