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THERE'S MORE THAN ONE WAY TO SCALE A CARRIER [Rural Telecommunications](Rural Telecommunications Via Acquire Media NewsEdge) s technology, regulations, customer demands and the marketplace change, the ability to offer new products and services becomes more important than ever. A handful of rural carriers have banded together to launch a new company designed to achieve scale-not just to serve more access lines but to make it easier to enter new lines of business and diversify revenue streams. Generally, small businesses like rural local exchange carriers (LECs) encounter obstacles to offering new services due to a lack of scale. Small companies in any industry always have an inherent disadvantage compared with their larger counterparts when it comes to making major purchases and provisioning customers on a per-unit basis, simply because the more customers a company has, the lower its average cost for each customer tends to be. Many small companies, rural LECs included, have long looked to buying consortiums, partnerships and joint ventures of many types in an effort to achieve scale, making costs of equipment, maintenance, customer acquisition and marketing more manageable. Another way to achieve scale is through mergers and acquisitions. The rural telecommunications industry is no stranger to this approach cither. As in many sectors, there arc a certain number of companies that, for whatever reason, are no longer in operation as independent entities. Whether desired or not, at times this sort of change is inevitable. In some cases, a transfer of ownership, along with an attendant reduction of costs, can revitalize a local carrier and bring customer benefits that were not possible under the previous structure. How can carrier acquisitions, when they occur, achieve the best results for customers, as well as the industry as a whole? Roughly two years ago, five rural carriers considered this question and came up with a plan. Rather than achieve scale by being acquired or by merging with other carriers, these five companies formed a new entity, USConnect. This new company, jointly owned by the five carriers, was created specifically to leverage its founders' extensive experience in rural telecommunications, and to take under USConnect's organizational umbrella small carriers that might otherwise struggle. This way, both the holding company and its component carriers would benefit from additional scale, as well as the expertise of its original investors (see sidebar, "Five Investors") that understand the unique characteristics of providing service in rural America. The Shane Align The general concept behind USConnect has been discussed informally within the industry for a long time. "We've been talking about it for 20 years, maybe even earlier than that," said Bill King, president and managing principal of JSI Capital Advisors, LLC (Manchester, N.H.), a communications investment firm that was involved in the new company's formation. "But things had to come together, both in the marketplace and within the industry." The right mix of circumstances apparently started to appear around 2012. A number of factors were in play, according to Denny Law, general manager of Golden West Telecommunications Cooperative (Wall, S.D.), one of the partner carriers. "Technology was changing, making things possible that couldn't really be done before, or at least, now we could do them economically," Law said. "Consumer demands have been changing too." This leads to potential new services that could diversify revenue sources. "We saw some opportunity to do even more if we could achieve some scale," he said. While it was not the only factor, regulatory changes also played a large role in getting the investing companies together. In late 2011, the FCC released the universal service transformation order, which subjected high-cost recovery mechanisms rural carriers rely on to even more cuts and caps. The order also introduced considerably more regulatory uncertainty through complex, unpredictable formulas. It gave a clear impression that the FCC felt that rural carriers were inherently "inefficient," and that the commission was going to treat them that way regardless of the true situation. "Rural carriers have been making things more efficient for a long time," King said. But the hostile situation did serve as a sort of focal point. "We saw an opportunity in adversity." The investing companies came together when things were at a low ebb. "There were technological and marketplace changes," Law said. "But we're all impacted by regulations. Things were likely to get more difficult, and there are benefits to scale and collaboration. The timing was right." It took a little over a year to hold some serious discussions, make decisions and develop a business plan. USConnect was incorporated in March 2013, and closed on its first properties that December. It brought more rural carriers into its fold in February 2014. Ventrical Gnouubh, Nob Jusb Honizonbal Gnouubh In many cases when carriers have been acquired, cash flow has been increased for the buyer simply by adding the revenue from the new company's access lines. But King noted that as access lines continue to decrease overall, this kind of horizontal growth is not a sustainable strategy. "That's just slowing down the melting of the ice cube," he said. Rather, USConnect is about using scale to make vertical growth more achievable and bringing new products to consumers, according to King. "It's about expanding services and products," he said, "not just gaining lines." Leo Staurulakis, executive vice president of consulting firm JSI (Greenbelt, Md.), which was involved in the formation of USConnect, stressed the need to diversify. "Carriers need to branch out and broaden their base," he said. "Individual companies can do this, especially the larger ones. But when you get some of these companies together, there are a lot of benefits in terms of both scale and collaboration." Local Brand, Local Sbaff Some years back, it was a common practice for carriers to change their names, especially after a change of ownership. However, companies acquired by USConnect will continue to operate under their current names. One of USConnect's biggest strengths is the community focus of its component companies, according to Staurulakis. "These companies have been around for 50, maybe 100 years," Staurulakis said. "That's a lot of history, and we don't want to lose it." King agreed. "The reputation of each company is a strong asset that can be leveraged. These are recognizable, local brands that customers know." The culture and atmosphere of each company is part of the local community. "Those existing relationships are valuable tools to help sell new services" that can help carriers branch out and diversify their revenue streams. King said. "We keep the local name because it's a solid local brand," Law said. "We want to focus on positioning these carriers for greater success in their market." Changing names at this point, according to Law, would detract from, rather than enhance, that effort. This approach extends beyond the carrier's name. USConnect also tends to keep local staff in place as much as possible. "We not only want to help them thrive," said Law, "we'd also like to leverage their talents across the larger organization, while continuing to develop their local strengths." In other acquisition situations, staff reductions have been commonplace. But the goal of USConnect is not just to reduce costs in the short run, but also to extend the benefits of the expertise that can be found in each company. "It's not about lowering head counts," King said. Law also stressed that the investments are calculated to be long-term. "The five shareholders are all rural LECs," he noted. "We're all operators who want to be successful on our own, in addition to bringing success to USConnect. We're not trying to roll up carriers and sell." Collaborabive Benefibe The combined talent found within the organization is among the biggest strengths of USConnect, according to Law. "We all recognize that changes are rapid. We have to refocus and adjust for the future. This is a great platform for us to collaborate." That collaboration is not only key to the business, but for Law, it is the most enjoyable aspect of the project. "I have the opportunity to partner with companies near and far," he said. "These are quality providers with strong leadership, and it's very gratifying to learn from each other and to share experiences. This kind of combined knowledge, along with our investments, really helps us to find future opportunities." NeHb Sbeps USConnect will consider further investment opportunities, according to King. Valuations and market dynamics can be fluid, so the investors will take a conservative approach. The company may also be open to bringing on more investors, but again, those situations will be examined on a case-by-case basis. The company's holdings include nonregulated businesses, and it is possible that could expand. As digital information becomes more important, companies that focus on data and information technology services may be considered as well. However, even though one of the properties USConnect obtained included some lowpower TV and radio operations, the company does not intend to focus on that area at this time. Moving forward, USConnect is looking to leverage the scale it has achieved thus far to expand service offerings in the most economical way possible. While not yet ready to disclose specifics, the company appears hopeful about its ability to further diversify its revenue and adjust to a changing marketplace. The USConnect approach, which emphasizes partnerships and collaboration to achieve scale, rather than traditional acquisition, could be a model other carriers use as the landscape of the telecommunications industry continues to evolve. * The USConnect) partnership model brings benefibs of scale bo rural LECs unbile leveraging bheir legaeg. Steve Pastorkovich is vice president-training and development at NTCA-The Rural Broadband Association. Contact him at [email protected]. (c) 2014 National Telephone Cooperative |