Merger Creates Premier Communications Provider to Enterprise
Customers CHARLOTTE, N.C. and FAIRPORT, N.Y., Aug. 14
/PRNewswire-FirstCall/ -- US LEC Corp. (NASDAQ:CLEC), a
full-service provider of IP, data and voice solutions to businesses
and enterprise organizations throughout the Eastern United States,
and PAETEC, a privately-held supplier of communications solutions
to medium and large businesses and institutions, announced today
that they have signed a definitive agreement to merge the two
companies. On a pro forma basis, the company will generate nearly
$1 billion in revenue, $187 million in adjusted EBITDA, and $109
million in free cash flow (adjusted EBITDA minus capital
expenditures). Cost saving synergies of $25 million have been
identified in the first year after closing, and $40 million
annually beginning in 2008. The combined company will have over
45,000 enterprise customers, consisting of medium and large
businesses and institutions. It will operate in 52 of the top 100
Metropolitan Service Areas (MSAs) in the U.S., with a leading
presence in the Eastern U.S., as well as several other major
markets across the country. Transaction Terms and Structure Under
the terms of the merger agreement, which was approved unanimously
by the boards of directors of both companies, PAETEC and US LEC
will become wholly-owned subsidiaries of a new publicly owned
holding company ("New PAETEC"). Taking into account outstanding
rights to acquire shares in the new holding company in the future,
US LEC security holders will own approximately 1/3 and PAETEC
security holders will own approximately 2/3 of the new holding
company. Upon closing, US LEC shareholders will be entitled to
receive one share in the new holding company in exchange for each
share of US LEC that they currently own, and PAETEC shareholders
will be entitled to receive 1.623 shares in exchange for each share
of PAETEC that they currently own. Based on US LEC's closing stock
price on August 11, 2006, the total enterprise value of the new
company will be approximately $1.3 billion. Upon completion of the
transaction, "New PAETEC" expects to be listed on the NASDAQ Stock
Market under the ticker "CLEC." Financing and Capital Structure US
LEC and PAETEC will finance the transaction through a combination
of debt and cash on hand. Deutsche Bank Securities Inc., Merrill
Lynch & Co. and CIT Group, Inc. have provided a full commitment
for $850 million of financing for the transaction, which includes
refinancing of both companies' debt, US LEC's Series A Preferred
Stock and an unused $50 million revolver. US LEC has entered into
an agreement to repurchase its outstanding Series A Preferred
Stock, held by Bain Capital and Thomas H. Lee Partners LP, at a
price which reflects a $30 million discount to its accreted value
(approximately $268 million as of December 31, 2006, net of
discount). Upon closing, this repurchase would eliminate US LEC's
Convertible Preferred Stock due April 2010. "This merger provides
US LEC shareholders with significant value and is a
transformational event for our company, creating substantial
opportunities for customers and offering shareholders of both US
LEC and PAETEC the ability to participate in the upside potential
of the combined company," said Richard Aab, Chairman of US LEC.
"This is an excellent fit from an operational and financial
perspective. An important rationale for our merger is the cost
savings we will be able to capture, as well as additional revenue
synergies that have not yet been factored into our financial
projections. With respect to integrating our technology, both
companies' networks are highly adaptive, capital efficient and
extremely compatible. The new PAETEC's customer base will benefit
from an enhanced capacity to deliver new, innovative communications
services and a relationship with an even stronger, more competitive
partner." "We are excited to be combining with US LEC," said Arunas
Chesonis, Chairman and Chief Executive Officer of PAETEC. "Rick and
I share a common vision for the industry and are firm believers in
our business models. This strategic combination of highly
complementary operating companies is about scale, scope and growth.
The new PAETEC will provide our combined 45,000 enterprise business
customers with some of the newest and most innovative solutions in
the rapidly converging world of voice, data and enhanced services.
Both PAETEC and US LEC are solid operating companies that have
proven themselves in a highly competitive marketplace. We share a
'customer comes first' attitude and are committed to building and
keeping world-class partnerships." Mr. Chesonis continued, "Given
the complementary nature of the two companies' product and
technology portfolios, as well as their geographic footprints, the
new PAETEC will be well positioned to capitalize on significant
cross-selling opportunities. I am confident that we will deliver
substantial long-term value to our customers and shareholders."
Achievable Synergies US LEC and PAETEC expect the proposed
transaction to provide substantial benefits for shareholders of the
combined company and significant value creation through identified
highly achievable synergies of $25 million in the first year after
closing, and $40 million annually beginning in 2008. As facilities
and operations are consolidated, a substantial portion of network
cost synergies and capital expenditure savings are expected to come
from increased scale and the smooth integration of the companies'
state of the art network operations and IT. Additional savings are
expected to result from combining staff functions and the
elimination of a significant amount of SG&A expenses that would
be duplicative in the combined company. Company Leadership and
Headquarters Upon the close of the transaction, Arunas Chesonis
will become Chairman and Chief Executive Officer of the combined
company, and Richard Aab will become Vice Chairman. Keith Wilson,
Chief Financial Officer of PAETEC, will become Chief Financial
Officer of the combined company, and EJ Butler, current PAETEC
Chief Operating Officer, will become Chief Operating Officer. J.
Lyle Patrick, Chief Financial Officer of US LEC, will lead the
integration efforts as Executive Vice President of Integration. The
combined company will be headquartered in Fairport, NY, and will
maintain US LEC's operations in Charlotte, NC, with significant
operations in the Eastern corridor and a significant presence in
several other markets throughout the country, including Chicago and
along the West Coast. Approvals The transaction is subject to
approval by a majority of both US LEC and PAETEC shareholders and
the satisfaction of closing conditions and regulatory approvals,
including receipt of financing and repurchase of US LEC's
outstanding Preferred Stock, expiration or termination of the
applicable waiting period under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976 and approvals by state public service
commissions in the states where the combined company will operate.
Bain Capital and Thomas H. Lee Partners LP, which collectively own
24% of US LEC's outstanding shares on a voting basis, and Madison
Dearborn Partners and The Blackstone Group, which collectively own
approximately 19.5% of PAETEC's outstanding shares, have agreed to
vote their respective shares in favor of the transaction. The
companies expect that the transaction will close in the fourth
quarter of 2006. Advisors Deutsche Bank Securities Inc. is acting
as financial advisor to US LEC and Skadden, Arps, Slate, Meagher
& Flom LLP is acting as legal advisor. Merrill Lynch & Co.
and The Blackstone Group are acting as financial advisors to PAETEC
and Hogan & Hartson LLP is acting as legal advisor. Deutsche
Bank Securities Inc. and Houlihan Lokey Howard & Zukin provided
fairness opinions to US LEC's Board of Directors. Merrill Lynch
& Co. and Capitalink, L.C. provided fairness opinions to
PAETEC's Board of Directors. Conference Call and Webcast at 10:00
AM (ET) Today PAETEC and US LEC will host a conference call for
investors and analysts today, August 14, 2006 at 10:00 AM Eastern
Time, to discuss today's announcement, as well as US LEC's second
quarter 2006 earnings. A live broadcast of the conference call will
be available online at http://www.uslec.com/ and
http://www.paetec.com/. To listen to the live call, visit either
web site at least fifteen minutes early to download, and install
any necessary audio software. For those who cannot listen to the
live broadcast, a telephone replay will be available shortly after
the call through the close of business on August 17, 2006 and
replay via web cast will be available through September 14, 2006.
About PAETEC PAETEC is an innovative supplier of communications
solutions to medium and large businesses and institutions. With the
belief that every customer has unique needs, PAETEC offers
personalized solutions that include a comprehensive suite of Voice
over Internet Protocol (VoIP) services delivered over our
Private-IP MPLS network. With more than 1,000,000 access line
equivalents in service, PAETEC serves more than 17,000 core
business customers across the U.S. by offering a full line of
telecommunications and Internet services, enterprise communications
management software, security solutions, and managed services. The
company was the recipient of the 2005 American Business Ethics
Award for a mid-size company, presented by the Society of Financial
Services Professionals. PAETEC is headquartered in Fairport, N.Y.
More information about the company can be found by visiting
http://www.paetec.com/. About US LEC Based in Charlotte, N.C., US
LEC is a full-service provider of IP, data and voice solutions to
medium and large businesses and enterprise organizations throughout
16 Eastern states and the District of Columbia. US LEC offers
advanced, IP-based, data and voice services such as MPLS VPN and
Ethernet, as well as comprehensive Dynamic TSM VoIP-enabled
services and features. The company also offers local and long
distance services and data services such as frame relay, Multi-Link
Frame Relay and ATM. US LEC provides a broad array of complementary
services, including conferencing, data backup and recovery, data
center services and Web hosting, as well as managed firewall and
router services for advanced data networking. US LEC also offers
selected voice services in 27 additional states and provides
enhanced data services, dedicated Internet services and MegaPOP(R)
(local dial-up Internet access for ISPs) nationwide. For more
information about US LEC, visit http://www.uslec.com/. Safe Harbor
The Private Securities Litigation Reform Act of 1995 provides a
"safe harbor" for certain forward-looking statements so long as
such information is identified as forward-looking and is
accompanied by meaningful cautionary statements identifying
important factors that could cause actual results to differ
materially from those projected in the information. The use of
words such as "may", "might", "will", "should", "expect", "plan",
"anticipate", "believe", "estimate", "project", "intend", "future",
"potential" or "continue", and other similar expressions are
intended to identify forward-looking statements. All of these
forward-looking statements are based on estimates and assumptions
by management that, although we believe them to be reasonable, are
inherently uncertain. Forward-looking statements involve risks and
uncertainties, including, but not limited to, economic,
competitive, governmental and technological factors outside of our
control, that may cause our business, industry, strategy or actual
results to differ materially from those expressed or implied in the
forward-looking statements. These risks and uncertainties may
include those discussed in US LEC's reports on Form 10-K, Form 10-Q
and Form 8-K on file with the Securities and Exchange Commission
(the "SEC"), and other factors which may not be known to us. Any
forward-looking statement speaks only as of its date. We undertake
no obligation to publicly update or revise any forward-looking
statement, whether as a result of new information, future events or
otherwise, except as required by law. Additional Information and
Where to Find It "New PAETEC" will file with the SEC a registration
statement that will contain a proxy statement/prospectus regarding
the proposed merger transaction between PAETEC and US LEC, as well
as other relevant documents concerning the proposed transaction.
Investors and security holders of US LEC are urged to read the
proxy statement/prospectus for the transaction and the other
relevant documents when they become available because they will
contain important information about "New PAETEC," PAETEC, US LEC
and the proposed merger transaction. The proxy statement/prospectus
will be mailed to stockholders of US LEC prior to their
stockholders meeting. Investors and security holders of US LEC may
obtain free copies of the proxy statement/prospectus and other
documents filed by "New PAETEC" with the SEC (when they become
available) at the SEC's web site at http://www.sec.gov/. Free
copies of the definitive proxy statement/prospectus and other
documents also may be obtained by writing to PAETEC, One PAETEC
Plaza, 600 Willowbrook Office Park, Fairport, New York 14450,
Attention: Investor Relations. Information regarding the identity
of persons who may, under the SEC's rules, be deemed to be
participants in the solicitation of stockholders of US LEC in
connection with the proposed transaction, and their interests in
the solicitation, will be set forth in the proxy statement of US
LEC and in the registration statement that will be filed by "New
PAETEC" with the SEC. Contact Information US LEC Investors: J. Lyle
Patrick, Executive Vice President and Chief Financial Officer, US
LEC, 704-319-1114, PAETEC Investors: Keith Wilson, Chief Financial
Officer, PAETEC, 585-340- 2970, Media: Steve Frankel / Sharon
Goldstein, Both of Joele Frank, Wilkinson Brimmer Katcher,
212-355-4449 DATASOURCE: US LEC Corp. CONTACT: US LEC Investors: J.
Lyle Patrick, Executive Vice President and Chief Financial Officer,
of US LEC, +1-704-319-1114, ; PAETEC Investors: Keith Wilson, Chief
Financial Officer, of PAETEC, +1-585-340-2970, ; Media: Steve
Frankel, or Sharon Goldstein, both of Joele Frank, Wilkinson
Brimmer Katcher for US LEC Corp., +1-212-355-4449 Web site:
http://www.uslec.com/ http://www.paetec.com/
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