US LEC and Paetec, both competitive service providers, are the latest to join the consolidation wave, announcing this morning that they will merge to form “New Paetec,” a company worth about $1.3 billion.

Under terms of the deal, Paetec shareholders will receive 1.623 shares in the new company for every one Paetec share, while US LEC shareholders will swap one share of old stock for a share in the new company. Paetec and US LEC will continue to operate as wholly owned subsidiaries of the new holding company.

Paetec Chairman and CEO Arunas Chesonis, who assumes those roles in the new company, said the two service providers had shared a vision in the past, and had “similar business models--we are extremely complementary as companies, and this merger presents a tremendous opportunity for long-term growth.”

The deal, which has been approved unanimously by the boards of directors of both companies, is expected to produce cost savings of $25 million in the first year after closing and $40 million annually beginning in 2008. Those synergies will come from network consolidation, reduced capex and the company’s increased scale. The new company starts with nearly $1 billion in revenue, $187 million in adjusted EBITDA and $109 million in free cash flow, the two companies said.

In an analyst call, company officials said the savings would come from consolidation of network facilities in the Northeast, where the two companies overlap, and from a reduction in overhead, including management costs. In addition, Chesonis said, the merged companies will be poised for greater growth, targeting business customers who seek a higher level of service. Specifically, he said the "New" Paetec would also target vertical markets in which the two companies have been successful and seek to sell US LEC’s data portfolio to Paetec customers and Paetec’s IP services including VoIP and security, to US LEC customers.

This is the latest in a continuing string of mergers as service providers consolidate to create the scale needed to compete. US LEC provides voice and data services in 16 Eastern states and Washington, D.C., concentrating on mid-sized to large businesses and offering IP-based services as well as legacy voice and data. Paetec operates a private IP-MPLS network, over which it offers a suite of business services including voice, data, Internet access and managed security.

Shareholders of both companies must still approve the deal. Richard Aab, board chairman of US LEC will become vice chairman. Keith Wilson, chief financial officer of Paetec, will become chief financial officer of the combined company, and EJ Butler, current Paetec chief operating officer, will become COO. J. Lyle Patrick, chief financial officer of US LEC, will lead the integration efforts as executive vice president of integration. The new company will be headquartered in Fairport, N.Y.

Aaron D. Cowell, president and chief executive officer of US LEC, will be leaving the company once the transaction is completed.

Separate of the merger announcement, US LEC announced that it had reached positive operating income of $1.7 million on total revenue of $106.7 million, an $11.4 million increase over the second quarter of 2005. End-customer revenue for the quarter was $92.5 million, up 14% sequentially. Adjusted EBITDA was $15 million.

Related Articles

Time Warner Telecom buys Xspedius

Merger drags down Sprint; Rev. A upgrade planned for Q4

BellSouth shareholders approve merger