FairPoint, Lumos signal M&A interest, but will they be buyers or sellers?

Sean Buckley, FierceTelecomFairPoint and Lumos are in the process of transforming themselves from small-town telcos to become larger fiber-based broadband providers for consumers and business customers. Similar to their larger ILEC (incumbent local exchange carrier) counterparts CenturyLink (NYSE: CTL) and Windstream, FairPoint and Lumos also trace their company roots as rural telcos and realize mergers and acquisitions are needed to grow.

While not revealing any specific targets, the CEOs of these ILECs have expressed interest in making a transaction as either a seller or as a buyer.

FairPoint first floated its M&A desires in its first quarter 2015 earnings call. At that time, FairPoint's CEO Paul Sunu said it "must consider mergers and acquisition as either seller or buyer as our overall strategy."

When pressed about the issue during the second quarter, Sunu would only add that they are looking at every option.

"We would consider whether or not our operating platform should be something to scale up or would be available as adding scale to somebody else," Sunu said during second earnings call. "So all of this is available to us and we have the ability to do some acquisitions under our current credit agreement, obviously that comes into play and the macro environment in terms of what's going on also affects us."

Who would be interested in acquiring FairPoint if it headed to the auction block?

One potential suitor for FairPoint is Frontier Communications. Besides having a similar focus on Tier 2 and Tier 3 markets, it has proven acquisition and integration chops to make a purchase of a company like FairPoint work.

Consider the fact that Frontier already purchased Verizon's (NYSE: VZ) assets in 14 rural states and AT&T's (NYSE: T) Connecticut wireline operations. It is now in the process of purchasing Verizon's lines in three more states. Frontier could use FairPoint's assets to deepen its presence in Northern New England while extending and upgrading broadband services into more areas. FairPoint is present in secondary markets in 17 states, something that Frontier is an expert in serving.

The Northern New England assets could also present an attractive proposition for Frontier. Besides having a deep residential broadband footprint, the service provider has built a 17,000 mile fiber and MPLS network that it uses to provide a mix of Ethernet-based services to businesses and wholesale services and wireless operators.

However, the near-term reality is that Frontier is working through the Verizon transaction and it probably won't make any big moves until that deal is completed next year.

No less important is Lumos. CEO Tim Biltz has expressed a similar desire to engage in some form of merger and acquisition strategy over the next year.

During its second quarter earnings call, Biltz announced that Pamplona Capital made a $150 million investment in the company, with $100 million of that being dedicated to making organic builds or inorganic moves to acquire new fiber or colocation assets.

Biltz told FierceTelecom in a recent interview that tuck-in acquisitions of colocation and regional fiber providers are a possibility.  

Fiber and colocation expansion continues to be a priority for Lumos. As of the end of the quarter,  Lumos added 145 route miles of fiber in the quarter, all of which are company-owned, ending the quarter with 8,100 total route miles. 

Initially built to support a 257-site fiber-to-the-tower (FTTT) contract with a major wireless operator, the buildout of its 665 route mile network serving Richmond, Petersburg, Norfolk and Hampton Roads, Va., has also attracted three new enterprise customers.   

It also has a total of 32 data center connections, including 19 commercial, six private and seven data centers it operates itself. Acquiring a regional data center provider or fiber provider could help it expand its reach to data centers and enhnace its on-net reach for business and wholesale customers. 

But then there's the question of what Lumos will do with its traditional rural wireline assets housed under its Residential and Small Business (RS&B) unit. The service provider has expressed interest in selling off this unit, a move that would allow it to sharpen its focus on its fiber-based business for carriers and business customers.

Depending on when it wants to make a sale of the rural assets, Frontier or Windstream's REIT Communications Sales & Leasing could be good candidates. Frontier already operates networks in Virginia while CS&L could purchase the assets and lease them back to Windstream or another smaller provider that has an interest in rural markets. The RS&B assets include a regional FTTH network, which was funded by a Rural Utilities Service (RUS) grant in 2010 that passes more than 5,300 sites.

Whether or not these scenarios unfold for FairPoint and Lumos, it's clear that these companies can't do business the same way they did when they were small telcos selling plain vanilla voice services. These providers realize that they must purchase other complementary assets or sell off non-core assets to compete with a growing threat of competitive providers that are anxious to gain new fiber market share.--Sean

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