MegaPath's sale of its wholesale business to Global Capacity may not be the largest deal in the competitive service provider industry, but it's notable in that it allows it to become a managed and cloud services specialist.
By selling the wholesale assets, MegaPath gets the cash it needs to invest in its managed and cloud services businesses.
"What we found over the past couple of years, it takes quite a bit of capex to run your network side and your value-added services side of the business and we chose to go down the path to try to focus on growing the high growth markets, which would be cloud services and managed services," said Craig Young, chairman and CEO for MegaPath, in an interview with FierceTelecom. "You'll see us spending all of our time to get to those double-digit growth figures in each of those categories."
According to a Light Reading report, the Global Capacity deal emerged after MegaPath approached Francis Najafi, founder and CEO of private equity firm Pivotal Group and the owner of Global Capacity, for new funds.
After it completes the Global Capacity sale, MegaPath will have more capital on hand to invest in growing segments like security. In particular, the service provider wants to help its business customers meet the emerging Payment Card Industry Data Security Standard (PCI DSS).
MegaPath's managed service and wholesale business was the product of various acquisitions including Covad Communications and Speakeasy. Much of this business, however, was focused on providing wholesale copper-based Ethernet over Copper (EoC), DSL and T-1 services.
Building and owning a last mile network made sense in that MegaPath could control more of the customer experience.
Cindy Whelan, principal analyst, Business Network and Wholesale Services for Current Analysis, wrote in a competitive intelligence report that the sale provides a number of advantages and challenges for MegaPath.
"MegaPath's sale of its wholesale division enables it to reinforce its focus on growth markets and gain some cash for future investment," Whelan wrote. "However, the provider is now wholly reliant on partners for its underlying service delivery."
This deal also has some major implications for Global Capacity, a provider of interconnection services for service providers and large businesses.
Global Capacity will immediately enhance its network footprint. By purchasing these assets it will gain 400 wholesale customers and a wide-reaching EoC network that's present in nearly 700 Bell Central Offices in the top 50 U.S markets.
Over the past year Global Capacity has been extending its service in both the U.S. and in key international markets, particularly the UK and Canada. It could potentially use the MegaPath assets to not only attract new customers, but perhaps become a conduit for international customers that need access into the U.S. market.
"Obviously, Global Capacity looks outside the U.S., but the MegaPath acquisition gives us more scale and density within the U.S. market as we continue to have international aspirations," said Ben Edmond, chief revenue officer for Global Capacity. "When we put our network where our customers are and where the suppliers are, our level of competitiveness and ability to execute for customers increases. We saw that 17 percent-plus growth in 2013 and a similar number in 2014."
Like MegaPath, Whelan agrees that the transaction does create some near and long-term challenges for Global Capacity. "Integrating MegaPath's assets will increase Global Capacity's on-net U.S. reach, while allowing the carrier to decrease costs by eliminating redundancy in network assets and operations," Whelan wrote.
But since the MegaPath assets are mainly copper-based DSL and Ethernet over Copper (EoC) facilities, they will face challenges from a host of traditional telcos and cable operators that are deploying last mile fiber and migrating to DOCSIS 3.1, which can support up to 1 Gbps over existing hybrid fiber coax (HFC) infrastructure.
"Over the long term, the company will continue to be challenged by shrinking wholesale margins as customers increasingly look to technologies that will support higher-capacity services," Whelan wrote.
Putting any challenges aside, the latest move by MegaPath and Global Capacity reflects the ongoing consolidation of the competitive service provider market, but also the notion that service providers need to sharpen specialty services such as cloud and wholesale. As service providers look to grab more market share, we'll see more service providers expand organically and through targeted acquisitions of complementary assets.--Sean