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Birch Telecom Inc. recently announced plans to merge with Ionex Telecom Inc. The deal will create one of the largest competitive telephone service providers in the southern and central United States and is expected to generate positive earnings within a year.
The combined company will serve about 500,000 telephone lines, heavily concentrated in Kansas, Missouri, Oklahoma and Texas and generate $350 million in annual revenue.
The new company, created through a stock trade between the two companies, will be named Birch Telecom. Additional financial details of the deal were not disclosed. Birch President and CEO David E. Scott will serve as CEO of the new company. Rick Pontin, CEO of Ionex, will join Scott in overseeing the integration of the two company's operations.
"I'm confident that with the excellent fit between the two companies and the scale of the new enterprise, we'll be generating positive earnings within a year of the merger. In fact, this is likely to be the first company with positive free cash flow to emerge since the deregulation of the local telephone monopoly," says Scott.
An investment group led by Gilbert Global Equity Partners, AEA Investors, Veronis Suhler Stevenson LLC and Texas Growth Fund -- the major backers of Ionex -- will provide about $40 million in equity funding. The backers will get a stake in the new company, but the amount has not been publicly disclosed. This investment will support plans to bring new customers onto the company's network, as well as provide a significant cash cushion.
Both Ionex and Birch have specialized in serving small to mid-sized businesses (SMBs), and both offer a variety of local, long-distance and broadband data services. The new company's flagship products are the Superpipe family of services developed by Ionex, which use the company's next-generation Lucent Technologies network to deliver voice and high-speed Internet over a single connection.
Targeting SMBs, Birch Telecom offers local and long-distance telephone service across about 40 major metropolitan markets in 10 states: Alabama, Georgia, Kansas, Mississippi, Missouri, North Carolina, Oklahoma, South Carolina, Tennessee and Texas. Birch owns and operates a high-speed data network, delivering broadband Internet access to businesses in Kansas, Missouri, Oklahoma and Texas.
Ionex Telecom provides voice and data services to SMB customers in Kansas, Missouri, Oklahoma and Texas. Ionex also offers local and long-distance phone service, high-speed Internet access and a suite of value-added voice and data products, including e-mail, voice mail, conferencing and electronic billing through the Ionex ATM network.
"Our strategies are very similar. The geography fit is almost a perfect overlap. That gives us greater density in existing cities we serve -- like 10 percent vs. 5 percent customer penetration," says Scott.
"In my view, [the current telecom environment] is a lot like guerilla warfare, it's block by block, customer by customer," adds Scott. Since customer service is key, it makes sense to focus on particular markets. It's also important that Birch has a large existing customer base in every market it serves, he says.
"We're going after Bells' market share by offering a better deal. We go into small customers and save them lots [of money] by integrating voice and data. We send knowledgeable sales reps," says Scott. "The monopolies haven't been very service-oriented."
