Time Warner Telecom (Quote, Chart) has extended its enterprise reach with the acquisition of privately held Xspedius Communications.
The buy, for $531 million including $215.5 million in cash, gives Time Warner Telecom (TWTC) greater market penetration in areas such as Florida, Texas and the high business-density Washington, D.C.-Baltimore metro area.
Overall, TWTC increases its reach from 44 markets to 75. Following the deal, TWTC expects to cover more than 60 percent of U.S. businesses within its footprint.
In a conference call to announce the deal, Larissa Herda, chairman, CEO and president of TWTC, said that Xspedius is present "in primary underserved tier-two marketplaces, which is the sweet spot for our business.
"It's large enough to be material for our business and small enough to be digestible," she said.
Xspedius offers metro Ethernet, which is gaining in popularity, as well as long-distance voice, data and dedicated Internet access to small enterprises.
Many of those are in areas close to where TWTC is already present, allowing the company to increase the density of its coverage.
For instance, the deal adds Miami, Jacksonville and Ft. Lauderdale to TWTC's presence in Florida. In the past, said Herda, TWTC "has had to walk away from a lot of business there."
Xspedius focuses primarily on smaller businesses than does TWTC, which makes it a particularly good fit.
According to Herda, the typical size of Xspedius installations is in the one-to-three T1 range, representing far smaller average revenues per user (ARPU) than what TWTC generates.
But far from turning up its nose at that customer base, TWTC believes those are easy wins for salespeople, as well as inexpensive for the company since the fiber is already laid.
"It's a nice business with good margins," said Herda.
Bear Stearns analyst Mike McCormack noted that the deal more than doubles TWTC's base to over 32,500 customers while adding 790 on-net buildings.
"The acquisition greatly enhances Time Warner's ability to compete for larger-scale, multi-city enterprise opportunities," McCormack wrote in a research note.
Herda said the moment was propitious for making this deal. TWTC, she said, is on solid enough financial footing to make a big bet on market share.
The acquisition allows TWTC to enter markets more quickly and more efficiently than if it had to build its own networks, she added.
Herda also said TWTC will adopt the smaller company's back-end processes for billing smaller customers, which are more efficient than TWTC's.
The transaction has already been approved by the required majority consent of Xspedius shareholders.
Closing is expected within six months, pending customary conditions, including applicable federal and state regulatory approvals.
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