Source: Daily Deal
 
Consolidation among competitive local exchange carriers shows no signs of abating, as industry and market sources say several companies are holding merger talks.
 
"There's clearly been an increased velocity of consolidation in the CLEC industry," said Andrew Lipman, a telecom lawyer with Swidler Berlin Shereff Friedman LLP.
 
Already this year, XO Communications Inc. bought out Dallas CLEC Allegiance Telecom Inc. in a deal valued at $628 million when announced in February, but which now has a value closer to $475 million because of a decline in the buyer's stock price.
 
More recently, equipment maker Corvis Corp., which last year bought Broadwing Communications Services Inc., acquired Focal Communications Corp. for $210 million outside of bankruptcy court.
 
There have also been several smaller transactions in the past year, and many of the companies now investigating deals are regional players, sources have said.
 
"There's a compelling thesis for consolidation, given the difficulty in growing revenues organically," said Marc Puntus of Miller Buckfire Lewis Ying & Co. LLC, which advised Focal on its restructuring and Chapter 11 case and on its sale to Corvis, among other transactions.
 
Though he would not comment on specific transactions, Puntus said consolidation was likely to begin among regional CLECs and that another stage of deals involving these superregional carriers might follow.
 
Many of these smaller players lack the scale to support their balance sheets, and one source observed that "it doesn't make sense to do $100 million to $150 million in revenue."
 
Several sources have said ATX Communications Inc., a Bala Cynwyd, Pa.-based telecom that filed for Chapter 11 protection in January, is a likely target.
New York-based holding company Leucadia National Corp., which bought WilTel Communications Group Inc. out of Chapter 11 protection in late 2002, has provided ATX's bankruptcy financing and is widely viewed as a potential suitor.
 
Folding ATX into WilTel's operations would mark a shift in strategy for the Tulsa, Okla.-based fiber network operator, which has traditionally focused on serving other telecoms. But WilTel has already given indications that it is moving beyond the "carrier's carrier" model. Earlier this month the company outlined plans to win large corporate accounts in finance, healthcare and other sectors.
 
A spokesman for ATX could not be reached.
 
Industry sources are also watching Choice One Communications Inc. of Rochester, N.Y. The company is restructuring its debt, and some think it could be involved in a deal.
 
On Friday, May 14, Choice One announced an amendment to the credit agreement with its lenders, reducing its cash requirements until November. Debt sources have said that the company has a standstill agreement with its banks and bondholders.
 
Choice One has retained Evercore Partners, and sources said its banks have retained FTI Consulting Inc. Choice One declined comment.
 
The company's situation is reminiscent of Allegiance's reorganization, several people said. Like Allegiance, Choice One has been able to arrange standstill agreements with lenders and bondholders. Also like Allegiance, GE Capital Corp. is the administrative agent for its bank debt, and it has funding from Morgan Stanley Capital Partners.
 
While the centerpiece of Allegiance's reorganization was a Chapter 11 sale to XO, observers said Choice One is trying to restructure outside of court.
 
Reorganized competitive carrier ICG Communications Inc. has sold some assets and retained Lehman Brothers Inc. and Pachulski, Stang, Ziehl, Young, Jones & Weintraub PC to explore other possibilities, which it said could even include a Chapter 22 filing.
 
McLeodUSA Inc., which exited bankruptcy protection in 2002, is selling fiber assets that it hopes will fetch $50 million.
 
Regional consolidation has started to take shape in the Southeast. In a prominent transaction, ITC DeltaCom Inc. and BTI Telecom Corp., of West Point, Ga., and Raleigh, N.C., respectively, merged last year. Both had backing from Welsh, Carson, Anderson & Stowe.
 
Larger telecoms are also prowling. Aside from WilTel, XO, Corvis and Vancouver, British Columbia-based 360networks Corp. have been acquisitive.
 
"You have no choice," one source said, noting that investors who acquired these telecoms need to load their networks with customers to drive margins higher.