Cloud service provider Fusion (NASDAQ: FSNN) says it has reached an agreement to buy the Cloud and Business Services customers, operations, and infrastructure of privately held Birch Communications. The deal, expected to close by the end of this year, would be an all-stock transaction worth approximately $280 million. Birch will retain its legacy consumer and single-line business customers, which Fusion describes as having "lower profitability and Average Revenue Per Customer (ARPU) as well as higher churn rates."
Fusion also will assume approximately $458 million in debt, which the company expects to refinance along with its existing debt.
If consummated, the deal would mark a significant expansion of Fusion's footprint. The combined companies would serve more than 150,000 business customers via a completely IP-based network that would comprise 30 data centers, 31,000 fiber route-miles of fiber-optic network infrastructure, and metro fiber assets in 11 major markets. Fusion believes the resultant scale will accelerate its single-source cloud strategy, which the company says offers a more efficient integration of cloud services and provides greater control over the end-to-end user experience.
"This acquisition is a major milestone in Fusion's targeted and disruptive strategy of becoming the leading single-source cloud services provider to business and enterprise customers," said Matthew Rosen, Fusion's CEO. "Customers increasingly demand an end-to-end experience that is reliable as well as efficient and innovative. Fusion is well positioned to provide these services having been first-to-market to pursue this strategy, and can now do so with increased scale and resources."
Fusion expects the combined company will see total pro forma annual revenue of approximately $575 million and more than $150 million in pro forma annual adjusted EBITDA, including anticipated cost synergies of more than $20 million within 12 months of the close date. The transaction is expected to be significantly accretive to Fusion's adjusted EBITDA immediately upon closing, generate positive free cash flow, and reduce the company's overall leverage ratio, with net debt expected to be less than 4.0X pro forma adjusted EBITDA.
"By leveraging the significantly larger scale of Fusion following the acquisition, the company will gain new efficiencies and greater cash flows, which we believe will drive shareholder value. We also expect that the new Fusion will gain broader awareness among investors and analysts, along with expanded access to the capital markets, which will further support our compelling growth strategy," said Rosen.
The integration strategy calls for Fusion and Birch shareholders to each appoint four directors to the combined company's Board, with a ninth director to be nominated by Birch shareholders with Fusion's prior approval. Rosen will become chairman of the board and retain his CEO title.
The merger agreement, which the boards of both companies have approved, calls for Birch shareholders to gain the right to receive, in the aggregate, shares of Fusion common stock equal to 3X the total number of issued and outstanding shares of Fusion common stock immediately prior to the merger. (This assumes conversion of all Fusion preferred stock into common stock and in-the-money warrants, but excluding current outstanding options.) Fusion estimates that it will issue approximately 73 million common shares of its stock in connection with the transaction, valued at $3.85 per share. When the dust clears, Fusion shareholders will have 25% pro forma ownership and Birch shareholders 75% pro forma ownership of the combined company. Nevertheless, the combined company will continue to be listed on the Nasdaq Capital Market and trade under the Fusion name and symbol (FSNN).
Birch has been active in acquiring assets itself in recent years (see, for example, "Birch Communications expands network footprint with Primus Telecommunications acquisition").
For related articles, visit the Business Topic Center.
For more information on high-speed transmission systems and suppliers, visit the Lightwave Buyer's Guide.