By now most telecom agents selling in or around the Northeast and Midwest have heard that one of the largest CLECs in that area, One Communications (a TA paid vendor member) is having challenges restructuring its debt to the point that One Comm's hired an outside firm to help review merger and acquisition strategies that might alleviate the debt challenge. (Scroll down below to listen to TA's interview with One Comm Channel VP Michael Fair where he spells out the debt situation.)
Having been through all the carrier bankruptcies in the last decade, I honestly believe that whatever happens to One Comm, whether they're purchased in whole or in parts by other investors or competitors, the One Comm business customer will likely suffer no major adverse impacts. One Comm agents might loose a bit of sleep though.
To find out what active One Comm agents are doing, business as usual or sending their orders elsewhere, I interviewed as many TA members about One Comm as I could find in a short period of time. Most suggested that while the situation was not ideal, they could not in good faith send the business elsewhere if the customer really wanted to move forward with One Comm - usually because the customer was buying on price.
Surprisingly, the hesitation some One Comm agents had about sending orders to One Comm had nothing to do with a possible sale but One Comm's perceived lack of resources to beef up the One Comm back office. Some agents seem to feel One comm is sending all its money out in agent spiffs and low prices to bring in the business leaving little to improve order provisioning and billing challenges.
It should be noted though that no One Comm agent I spoke with said One Comm had any network service issues. Once the circuits were in and up everyone was happy. The challenges seemed to all revolve around a slow installation and billing errors on the first couple bills that took a while to get fixed. Most of these implementation challenges were headaches for the agent and the agent's project managers more than they were problems for One comm customers.
The One Comm situation highlights the interesting market position occupied by regional CLEC. Where they have a great deal of network in their "on-net areas" they generally dominate in price and have robust (if transient) direct sales teams that are not distracted by the thought of offering another solution provider.
Agents in the One Comm footprint seem to have no interest in loosing a deal to a One Comm direct rep so most if not all are still sharing the complete One Comm "great price" story tempered with the "problematic installation and billing" story. Most business customers who are working with a good agent with a good agent back office are content to let the agent suffer through the installation and billing challenges, if any, so the customer can ultimately get a great price on a great network, no mater who ends up owning it.
Will Agents Continue to Get Paid?
Most think so. While smaller agents with low volume and direct agreements with One Comm will likely suffer some sleepless nights about whether the new owner will shed low producing agents, most TA members I spoke with were producing One Comm orders protected by what they believed was a bullet proof agreement through their large master agent.
One of the largest master agencies in the US, Intelisys, recently signed with One Comm, after their challenges were being publicly reported. This seems to suggest that in spite of their credit and debt challenges, One Comm is bringing something to the marketplace that independent sales reps need access to so they can be properly consultative and competitive.
A One Communications Agent Speaks
In speaking to several active One comm agents, most seemed resigned to wait out their fate while continuing to send appropriate business to One Comm. Most were thankful for what they'd learned about having a competent telecom attorney review their contracts or that they were "protected" under a powerful master agency.
The following interview is from a One Comm agent, that requested anonymity, who seemed both fond of One Comm and a bit disgruntled with the back office.
1. Are you selling them as you always have or have you slowed down for any reason?
Personally, I am selling them as I always have. While I have decent sales with them, they have not yet become one of my larger sales partners owing to consistent install and communication issues. For the circuits and locations I use them for, I have not slowed down.
2. Are you concerned that you won't get paid from them in the future?
I do not believe the news to be significant enough to create concern for a situation that would stop payment. I do not see them hitting a hard bankruptcy or liquidation. In terms of being sold off or gaining less agent-friendly investors… I am with a large master agency who is careful to contract for strong and clear assignment and Evergreen clauses.
3. How are their back office operations?
Poor. Customers (and agents) are happy after the circuit is installed service-wise. However, provisioning is a highly elongated nightmare that requires lots of attention and that is poor in communication until it is chased after. The invoices tend to be wrong at first with multiple errors that tend to get fixed slowly one at a time. They are fixed, though, and the circuits do eventually get in and are full quality. It is just a painful process. I have said more than once, and told them, they should chop off some of their super high commissions that are coupled with high spiffs and instead pay it to their back office provisioning and implementation teams instead as a bonus for in-time or better installs.
4. Do the customers seem to care about One Communications' problems or do they just want the lowest price no matter what?
Most feign concern, but in that space (customers) are looking for price. The fear isn’t great that even if they enter bankruptcy a judge would order their services shut down. That is not a likely scenario with the largest CLEC in the Northeast. Quality and service is an issue… but is not a big problem with One Com. Just the initial install is… and that does not seem to have leaked out much to customers.
Potomac Cruise Videos of One Communications' Execs
One Communications CEO Howard Janzen
One Communications Channel VP Michael Fair
I don't know Michael Fair personally, I've talked to him a couple time over the years, but when he joined One Comm as Channel Chief early last year many master agents seemed pretty happy as he's known to be very channel friendly.
The following interview suggests that One Comm's "debt covenants" were inherited by One Comm's current leadership team and they're doing all they can to negotiate the company to a better place.
Click here download the MP3 of the recording.
Click the following audio player to listen to the interview now.
Following is a rough transcript of the interview for those of you that like to scan as they listen.
Dan Baldwin: This is Dan Baldwin and today I’m speaking with Michael Fair, Channel Vice President for One Communications. Michael, thanks for speaking with TA today.
Michael Fair: Sure, glad to be here.
DB: Michael, on the One-to-One Communications website, there's a press release that states
that One Communications has retained Blackstone Advisory Services to evaluate strategic
alternatives for the company, coupled with One Communication’s announced sales of their other
assets including FiberNet and Fibertech, one is left with the impression that One Communications
is selling assets to raise money to reduce debt.
What does all of this activity mean to agents and their customers and, while I'm sure you can't predict what will happen, what are some of the best case and worst case scenarios that agents should be discussing with our clients and prospects?
MF: Thanks for the opportunity here to answer the questions and to discuss this with you. You
know, One Communications is the largest non-public CLEC in the industry and we always have a
goal of what we are communicating with our partners and customers because we don't have publically
available financials and things like that. So it's one of the reasons we want to be as prescriptive and
transparent as possible with all of our financial information.
But in general, One Communications has been exploring the financing options of the past 18 months, and this is really kind of a result of an interesting situation and when One Communications was put together originally about 4 years ago, we entered into a series of debt agreements that have an extremely low, actually below market interest rate. And in exchange for that, we have extremely high debt covenants and we are in a unique situation with that and so for the past 18 months, we've actually been looking to refinance that situation. And just because of the economy and the tightening of credit, we have decided to go down a different path.
The company actually had FiberNet, what I would call is a stranded asset within the company and the very high level of fiber assets has been operated in to separate business unit completely separate from One Communications, but it is a separate subsidiary, and we were able to generate a market sale of that for a much higher multiple than a traditional CLEC piece of business.
And through that process, we also generated quite a lot of interest in the core company, and so the announcement with Blackstone, who we have actually have been working with for a number of years now, was really just an announcement to the market that we want to cast a wider net and to explore wider options to either engage in a merger and acquisition situation or a sale transaction.
DB: Okay, Blackstone is there now and they are looking at all the different opportunities that face One Communications. What are the different possible best case and worst case outcomes or scenarios that an agent should be discussing with their clients and prospects?
MF: Well, I think there's really two separate potential buyers: there is either peer play financial investors such as this private equity firm, that basically is the type of firm that bought FiberNet, which is called Intelis (which is mostly a financial company that's out looking for value, priced assets). That’s one route and that would leave the company, basically as it is today, but in a much better financial situation and we're really looking to not just refinance our debt, we're really looking for an owner that will take the company to the next level and continue to invest in the business to the extent that we need to
really grow it to where it went on today.
The other type of a company or companies that may buy One Communications could be a strategic partner and that would be someone that probably is a competitor today, and they would be buying us for our assets for the company, for the capabilities and the customer base and things like that.
Regardless of what type of company were to purchase One Communications today, the net result would be a stronger company that is going to be refinanced and will be able to grow more diligently. We have been in the situation for the past 18 months where we have been literally under these debt covenants, we have not violated any debt covenants, but we have been operating the company with that goal in mind and it has caused us to cut back somewhat and some of the internal investments in wealth and reasonalization and things like that we've may have wanted to do.
The goal is to get to a point that we can continue to invest in those kind of scaling capabilities.
DB: Well you're certainly getting some votes of support. I spoke with Intelisys and they recently came on board as a distributor partner and they're one of the biggest master agents in the country. Clearly, you know some of the biggest folks in the industry and they don't see the worst case coming to happen, but, is there a possibility that the company won't be sold and is something bad going to happen as a result of that?
MF: There's always the possibility . I think we will get a refinancing done; that’s something that will happen one way or another.
The vote of confidence from Intelisys was a key element in this and we've been actually been pursuing them for a year and a half. They finally felt comfortable. I've actually had a lot of demands from their sub-agents to add us in to their portfolio. (We're) the largest carrier in the industry that they did not have, and they felt comfortable in adding us not only with our financial situation, but also our capabilities to be able to support them properly.
The company actually is indeed with the positive company. We spin off a substantial amount of cash and actually our debt coverage ratios are actually better than most of our CLEC peers. We just happen to be hampered by these extremely tight debt covenants which create a very unique ‘perfect storm’ of issues that we've got to overcome, but really has nothing to do with operational performance or ability to service the debt.
We have actually organically paid down debt over the past couple of years and, so it's an unfortunate
situation we found ourselves in, but it's not something that, given the assets, are very valuable. We've
seen that with selling off a small portion of the company with Fibertech and also we've generated
substantial interest from some other players in the core company as a whole.
DB: Well, when I spoke with some of the master agencies, they said, “where One Communications plays, you simply cannot ignore them, so you might as well be partnered up.”
Do you have any specific time frames moving forward if a larger opportunity is looking at One Communications now, maybe they'll say "Well wait 30 days to see what happens with One Comm because I want to go with
them, but I want to see what happens."
Are there any specific time frames for people that want to to "hold their breath" and see what's going to happen, or is a time frame currently undetermined?
MF: It's fairly undetermined and we would like to have a transaction done by the end of the year, but there's no specific time line associated with that. We are doing business as usual.
We're actually looking to close out a very strong sales month for September. We've had a number of
record sales months, not just within the partner program but within the company during this year.
And our percentage of deals in terms of sales for the partner further as a whole have continued to
grow within the company.
I'm spending my time looking out in to what we're doing for next year, we're planning on spending some 4th quarter where I'm currently evaluating our sponsorship for the Channel Partners event in March and what are we going to be doing from there, as well as just planning for our you know, we're also adding, and we are have already added what we've looking towards our Master's Club trip to Mexico in April.
So, these are really the things that we're doing everyday . It's just business as usual. Most of our partners, once you really talk to them they've been aware of this situation for quite a long time, it's really hasn't changed anything and we don't anticipate any change in their behavior at all.
DB: Is this set of circumstance unique to One Communications or are there other CLECs that may find themselves in the similar financing situations, I mean, you all came through the early 2000's in exact same time frame?
MF: Yeah, that's a good question. I think that, from my understanding of the debt market and what our specific debt covenants are, that this is the unique situation to One Communications, so, I think there's very specific pieces of that are relatively unique to us.
Again, we do have a better debt coverage ratio than most of our peers within the industry, but I think you will continue to see continued consolidation within the CLECs business. So, I think scale, it'll probably gonna scale, enable better, getting people with.
You know the ILECs as well as the cable companies. We're seeing a lot of competition involved funds and the cable companies are not being but progressively enter the partners phase as well. And you know, the economy is a scale between, you seen the reason enough with some PAETEC etcetera that I think you will continue to see consolidation accelerate.
So, that's not unique to us. I do think that very specific debt issues that we have that maybe unique just because of the structure that they're originally put together.
DB: Great. This is Dan Baldwin. We've been talking to Michael Fair, Channel Vice-President for One Communications. Michael, we appreciate you speaking with Telecom Association today. Is there anything that you want to share in closing?
MF: No, I think we've covered at all. I really appreciate the opportunity to tell the full story. I know there's a lot of moving parts to it but I can firmly believe that One Communications is poised to be successful to be successful out into the future and partners and then users to feel comfortable with that.
What are your thoughts on One Communications? Please share your comments below.