Qwest Communications International Inc. (NYSE: Q) announced today that it will acquire privately held OnFiber Communications, Inc., an Austin-based provider of custom-built and managed metropolitan Ethernet and wide-area network solution.
The agreement calls for a $107 million purchase price with Qwest having the option up until closing to substitute up to $35 million of Qwest shares for cash. The transaction is anticipated to close in the third quarter.
OnFiber specializes in high-bandwidth, all-fiber solutions serving primarily large business and government clients. The company operates an all-optical network in 23 metropolitan areas and features a full offering of access and transport services, including Ethernet, SONET and Wavelength.
Qwest currently provides similar solutions to metropolitan areas within its 14-state operating region, and this acquisition deepens Qwest's already significant out-of-region metropolitan coverage while meaningfully reducing third-party access costs. Qwest's nationwide MPLS backbone network extends throughout the United States and carries nearly 4 billion voice-over-Internet Protocol minutes per month.
"This is a sound, complementary deal for Qwest, OnFiber and both companies' customers," said Tom Richards, Qwest executive vice president, business markets group. "This union gives businesses choice in national providers. OnFiber brings a unique approach to delivering and managing custom fiber networks that has proven to be efficient and cost-effective.
OnFiber expects to post revenues of nearly $60 million in 2006* — representing year-over-year growth of more than 20 percent. Last year, the company's average revenue-per-employee reached nearly $450,000 and its average monthly customer revenue at more than $17,000, was among the highest of competitive telecom providers. OnFiber serves leading companies in industry verticals, such as media and entertainment, financial services, software and healthcare.
"We expect the Ethernet market will grow upwards of 50 percent annually; Ethernet has been a high growth product for us in-region, and this increases our participation nationally," said Richards. "For Qwest, this expands our penetration in key markets throughout the country while reducing last-mile costs. It absolutely fits our criteria for a return-focused acquisition.
Qwest anticipates run-rate synergies of about $25 million annually – most significantly in the elimination of overlapping facilities and the reduction of network access costs. The company also expects the transaction will be accretive to EBITDA and free cash flow starting next year.
"The overwhelmingly positive customer response we've earned from our unique approach, which is to design, build and manage purpose-built network solutions, proves our model is effective," said Danny Bottoms, OnFiber's president and CEO. "By joining Qwest, we'll be able to advance the OnFiber vision while offering customers more product depth. OnFiber's national presence increases Qwest's access density in metro areas outside of its region.
- 2006 cost of revenues is estimated at $32 million and 2006 selling, general and administrative expenses are estimated at $13 million.