2010 Year in Review: CLECs bulk up on fiber and services

The News: While the CenturyLink (NYSE: CTL)-Qwest (NYSE: Q) and Frontier (NYSE: FTR)-Verizon (NYSE: VZ) marriages were clearly the biggest talk in the wireline M&A town, CLECs were just as active on the merger and acquisition front in 2010.

Similar to Tier 2 ILEC consolidation, CLECs are also motivated to scale their not only their network reach, but being able to become bigger players to get access into larger business accounts.

Looking to scale their respective business, there are two clear drivers that are bringing CLECs to the table: fiber network expansion and scaling their service sets.

On the fiber network expansion front, there was no shortage of deals in to be had in 2010. Three CLECs that were perhaps the most aggressive on the fiber expansion front were clearly Lightower Fiber Networks, Paetec (Nasdaq: PAET) and Zayo.

In Paetec's case, the acquisition of Cavalier Telephone not only enhanced their SMB service and even residential customer base, but it also came with its wholesale carrier Intellifiber division. At the time it was bought by Paetec, Intellifiber's fiber network included more than 17,000 route fiber miles and over 700 On-Net Buildings. Upon completion of the deal, Paetec boosted its fiber footprint to 10,600 metro fiber-route miles and over 36,700 total fiber-route miles.

Arunas Chesonis, chairman and CEO of PAETEC, said in a release that the "acquisition of Cavalier fits our strategic plan to add both fiber assets and regional density to better serve our customers and realize increased network synergies, both in the local loop and long haul."

Lightower and Zayo also beefed up their fiber holdings throughout 2010 as well. Seeing a stronger demand for higher speed services in its Northeast markets, Lightower acquired three smaller independent fiber providers Lexent Metro Connect, Open Access and Veroxity.

Throughout 2010, Zayo continued to not only expand its own existing fiber footprint, but it made two key acquisitions of American Fiber Systems and AGL Networks to boost its fiber footprint to serve its growing base of enterprises and wireless carriers. The combination of the AFS and AGL acquisitions with its own build out strategy prompted Zayo to launch Zayo Fiber Solutions (ZFS), a division that will design, build and manage dark fiber networks for wholesale carrier, enterprise and government customers.

For other CLECs like Earthlink (Nasdaq: ELNK) and MegaPath, the M&A strategy wasn't just about expanding their fiber footprints, but also their overall reach and service portfolio.

Known as a pioneer of dial up Internet access, Earthlink's CLEC acquisition strategy is about boosting the network and service capacity of its business services unit, a strategy that began with its acquisition of New Edge Networks in 2006. Its more recent acquisitions of both ITC^Deltacom and now One Communications provides the service provider with business network presence in both the South and now the Northeast.

Similarly, MegaPath, a well known as a managed services player, not only merged with Covad, but later with SMB VoIP provider Speakeasy to create what it calls a Managed Services Local Exchange Carrier (MSLEC). Under this MSLEC designation, the new MegaPath can target business and even carrier customers on three fronts: Speakeasy brings its VoIP service; MegaPath brings its managed services suite; and Covad brings its facilities-based wholesale network.

What's signifcant about it? Much like the consolidation of the Tier 2 ILEC market, CLECs are using M&A as a way to scale their respective businesses to target new larger business and wholesale opportunities. As we go into 2011, the obvious question is will this CLEC M&A acquisition fest continue or will the next year be one where they will be spending time integrate the assets they bought over the past year and honing their respective service sets?  

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