Lumos Networks has secured $150 million in funding Pamplona Capital Management, enabling it to pay down debt and pursue new potential organic and inorganic growth opportunities.
Out of this $150 million amount, Lumos will dedicate $50 million of the investment proceeds to pay down its existing debt and costs related to the transaction and the remaining $100 million to pursuing potential growth opportunities.
Speaking to investors during the second quarter earnings call, Tim Biltz, CEO of Lumos, said that Pamplona is a partner that understands how to help it reach its goal of becoming a pure-play fiber provider.
"We have secured a private equity partner to secure exactly what this business needs at this critical juncture, which is significant capital for organic and inorganic opportunities necessary to create a standalone pure-play fiber infrastructure company," Biltz said.
Biltz added that "their objectives are the same as ours, which is to create significant shareholder value by investing in infrastructure that's underpinned by long-term contracts with large enterprise and carrier customers."
As part of its agreement with Pamplona, William Pruellage, a partner of Pamplona based in New York, and Peter Aquino, former executive chairman of Primus Telecommunications Group and former president and CEO of RCN Corporation, will become members of Lumos' board.
Under the terms of the agreement, affiliates of Pamplona will invest $150 million in debt securities of the company and will acquire up to 5.5 million shares of the company's common stock.
While he would not disclose any potential acquisitions, Biltz said having extra capital on hand will give Lumos what it needs to get a seat at the buying table.
"The reality is that in order to be relevant in organic and inorganic large deals you have to be prepared before you get invited to the party," Biltz said. "We raised this capital and put this $100 million on the balance sheet net to do two things: to become relevant because we're entering a phase where the opportunities organically in the RFP space have never been larger and we have developed a list of inorganic opportunities that are focused on fiber and colocation around our network."
However, Biltz would not disclose any particular opportunities other than to say that "it will be diligent on how we deploy that capital."
Financial analysts applauded the move, saying that the investment would help Lumos become an even more powerful player in the Southeast.
"Pamplona has very much aligned its interest to help LMOS grow, in our view," said Jennifer Fritzsche, senior analyst for Wells Fargo, in a research note. "Pamplona's investment would only further deepen LMOS's asset portfolio and in our opinion allow it to be one of the strongest fiber players in the Southeastern region of the US."
During the second quarter, the service provider saw continual gains from its wireless backhaul and enterprise business lines.
Wireless backhaul continued to grow in the second quarter as the telco ended the quarter with 976 "unique" FTTC sites, up 69 percent sequentially and up 45 percent from the prior year. It also ended the quarter with a total of 1,307 total FTTC connections, a figure that's in line with its growth target, an increase from 49 percent in the previous year. Over the past year, Lumos installed 431 FTTC connections.
Although Lumos expects to see revenue declines in its carrier business as more of its wireless and other carrier customers migrate off of TDM to fiber-based Ethernet solutions, it expects to grow its overall data revenue by 8-9 percent in 2015.
Over 90 percent of its fiber to the cell (FTTC) and enterprise revenue is now IP-based services.
"Given the substantial industry commentary surrounding TDM grooming it is no surprise that we saw some heightened transport churn," Biltz said. "We now expect that our 2015 transport revenue will decline 10 percent versus prior guidance of the mid to single digits, but even with these declines we still target to grow our data revenue in the range of 8-9 percent and expect to accelerate this growth in 2016 as our fiber-to-the-cell and enterprise businesses become a larger piece of our data business."
No less compelling was its Enterprise segment. During the quarter, the telco renewed enterprise accounts totaling $225,000 in monthly recurring charges (MRC), up 60 percent from the prior year period. In the last six quarters, Lumos has renewed approximately 27 percent of the total Enterprise monthly revenue stream on long-term contracts of 3-4 years. In the first half of this year, the telco renewed Enterprise accounts totaling nearly $18.5 million in total contract value, a 60 percent increase from the first half of 2014.
Fiber expansion was also a factor during the second 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. It also added 44 enterprise lit buildings in the quarter and 97 in the first half of 2015, up over 70 percent from the second half of 2014.
The company is also building an approximately 665 route mile network serving Richmond, Petersburg, Norfolk and Hampton Roads, VA to serve a mix of FTTC and enterprise customers.
But the new fiber network is not based on a build-it-and-they-will come strategy. Initially being built to support 257 towers for a large wireless operator customer, Lumos said that it has also received a number of enterprise customer commitments to connect area locations.
"Our target is to complete the vast majority of our 665-mile network expansion by the end of 2015," Biltz said. "This network underpinned by a FTTC contract from a U.S. national wireless carrier was originally scheduled for 2016 and we are now all hands on deck to finish this project by the end of 2015."
Second-quarter 2015 company operating revenues were $50.9 million, up from $50.1 million in the same period a year ago.
For the full year 2015, the company reiterated its financial guidance with approximately $202 million in revenue, Adjusted EBITDA of approximately $92 million and capital expenditures of approximately $112 million.
Shares of Lumos were trading at $12.58, down $1.41, or 10.08 percent in Thursday afternoon trading on the Nasdaq stock exchange.
- see the earnings release
- listen to the earnings webcast (reg req.)
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