Survey: Ma Bell won’t get ‘churned’ with DirecTV

Contact: Brenon Daly

AT&T’s planned $48.5bn purchase of DirecTV has one thing going for it that Comcast’s similarly sized acquisition of Time Warner Cable doesn’t: customers don’t necessarily hate the providers. That’s at least one way to handicap the outlook for the two proposed pairings, which total, collectively, about $94bn in transaction value. The two deals represent the second- and third-largest tech transactions since 2003.

In the end, the return on both of these mammoth bets by telcos will be determined by how well the new owners serve customers. On that count, AT&T – both by itself and with the addition of DirecTV – has much more goodwill among TV consumers that Comcast-Time Warner Cable, according to ChangeWave Research, a service of 451 Research. In a March survey of 4,375 North American residents, about one-quarter of respondents said they are ‘very satisfied’ with AT&T U-verse and DirecTV. That was more than twice the level that said they are very satisfied with Comcast (11%), and four times the level for last-placed Time Warner Cable (a paltry 6%).

Perhaps more importantly, the ChangeWave survey indicates that TV subscribers aren’t planning to stick with the service they don’t like. (We would note that for service providers, which rely on monthly billing subscription fees to offset huge capital expenditures, churn is particularly corrosive to business models.)

According to ChangeWave, one in eight respondents said they plan to switch from either Comcast or Time Warner Cable in the next half-year – half again as many who planned to jump from either AT&T U-verse or DirecTV. And where are the dissatisfied TV subscribers likely to look to get their fix of The Real Housewives of Orange County or SportsCenter ? Well, it just so happens that DirecTV and ATT U-verse are the most likely replacement service providers, according to ChangeWave.

CW TV switch


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Birch Communications blossoms with $323m Cbeyond acquisition

Contact: Scott Denne

Birch Communications has moved out of tuck-in territory with its acquisition of Cbeyond, a network service provider that’s larger than Birch itself. Having existed in some form since 1996, Birch has grown through acquisitions, but most have been small customer or geographic expansions – nothing on the scale of its $323m purchase of Cbeyond.

The acquisition values Cbeyond at 0.7x its last 12 months revenue, and Birch expects the combined company to have about $700m in annual revenue, with Cbeyond contributing more than half the total. Prior to this deal, Birch had completed 21 acquisitions. Most of those were asset purchases, including the three deals it closed in 2013: Ernest Communications’ customers, Lightyear Network Solutions’ network and customer assets, and switching facilities in 10 states from Covista Communications.

In exchange for $323m, Birch gets a business that faces declining revenue in the face of shrinking margins and growing churn for its legacy network connectivity business. It also gets Cbeyond’s core mid-Atlantic network and the potential to expand deeper into cloud services – something Cbeyond had tried to do on its own, but the growth of that business couldn’t keep pace with the decline of its legacy offerings. Cbeyond’s annual revenue dropped 5% in 2013 to $463.4m, and it anticipated further declines, projecting 2014 revenue of $410m-430m.

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Making money with coupons

Contact: Ben Kolada

Online coupon directory vendor RetailMeNot, formerly known as WhaleShark Media, filed its IPO paperwork on Monday. A total of seven investment banks crowded onto the offering, which could initially value the company in the ballpark of $800m. Meanwhile, a recent high-priced buyout and a couple of more coupon deals that we hear are in the pipeline could make 2013 a breakout year for the online couponing industry.

RetailMeNot has grown dramatically since its incorporation as smallponds in 2007. Through organic and inorganic growth, RetailMeNot increased total revenue 80% to $145m last year. The company primarily did business as WhaleShark Media throughout its lifetime, but rebranded as RetailMeNot this year, taking the name of a startup it acquired in 2010 and whose websites now account for the majority of its traffic.

No fewer than seven investment banks have piled onto the offering, with Morgan Stanley taking the lead left spot. RetailMeNot plans to trade on the Nasdaq under the symbol SALE.

The midpoint valuation of recent comparable transactions suggests that the company could debut at about $800m, or roughly 5x its trailing sales ($155m as of March 31). RetailMeNot was valued at 5.6x trailing sales in its $159m sale to WhaleShark Media in 2010. More recently, we estimate that Slickdeals was valued at 4.6x sales in its quiet sale to Warburg Pincus at the turn of this year.

At least two other coupon companies will be closely watching RetailMeNot’s debut. We’ve heard that CouponMom and dealnews have also been in the market recently.

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The value of information

Contact: Ben Kolada

In its largest-ever acquisition, IHS is paying $1.4bn for Southfield, Michigan-based automotive data and information provider R.L. Polk & Co. Consumers may know the company better as the provider of the CARFAX vehicle information product. The deal is a significant move to grow a relatively young IHS division.

While IHS Automotive was launched just two years ago, Polk was founded in 1870, nearly four decades before Henry Ford’s first Model T hit the road. The company today provides online market research and a database of VINs for the automobile industry. Its Polk division accounts for about 40% of revenue. The remainder of revenue comes from its CARFAX division, which provides an online database of vehicle history information for used car dealers and consumers.

IHS claims growth potential was the rationale for this acquisition. Although Polk’s total annual revenue has only grown in the mid- to single-digit range, its CARFAX product has recorded ‘solid’ double-digit growth annually. Meanwhile, IHS says CARFAX is only 20-30% penetrated in the US. IHS also sees particular upside in international markets, where Polk currently generates just 12% of its sales.

IHS is paying $1.4bn (90% in cash and 10% in stock) for Polk, valuing the target at 3.5x its annual revenue and approximately 14x its adjusted EBITDA. (IHS disclosed that Polk generated adjusted EBITDA in the mid-20% range.) Evercore Partners advised Polk, while M. Klein and Company advised IHS.

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Undressing demand for wearable technologies

Contact: Ben Kolada

Still in the fad phase, wearable technology is gaining market interest, driven by new devices being introduced both by tech companies and old-school consumer goods firms. The advent of these new Internet-connected form factors, such as ‘smartwatches,’ fitness and health devices, will spur the creation of new application markets in the technology industry.

Demand for wearable technology is specifically being seen in interest for an Apple iWatch, a smartwatch that many expect will be released later this year. According to a recent report by ChangeWave Research, a service of 451 Research, prerelease demand for the iWatch already matches what the iPad and Intel Mac saw before their respective debuts.

The likely launch of the iWatch and overall emergence of new wearable technology devices, such as Google’s Glass, Nike’s FuelBand, Jawbone’s UP and various devices from Fitbit, will create new markets in application software. For example, there’s already an investment syndicate, called Glass Collective, made up of VC firms Google Ventures, Andreessen Horowitz and Kleiner Perkins Caufield & Byers, that are ready to fund companies building new ways to use Google’s Glass device.

Our senior mobile analyst, Chris Hazelton, believes these devices will create extremely tight bonds between users, the cloud and very likely new technology players. For example, unlike smartphone and tablet apps that are used infrequently or once and discarded, Google Glass apps will be persistent, following and advising a user throughout their day.

If you already own a wearable tech device, or are planning to buy one, let us know what you think of this sector and which applications you think will become most valuable. You can tweet us@451TechMnA or contact us anonymously.

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Will Sprint side with strategy?

Contact: Ben Kolada

DISH Network’s $25.5bn offer for Sprint Nextel represents a 13% premium to SoftBank’s October bid, but its lack of mobile experience may ultimately cause the company to lose the deal. Stock plays a major component of both transactions (32% for DISH versus 30% for SoftBank), meaning the future value of either deal will be dependent on which company – SoftBank or DISH – will be able to better execute in the mobile market. Arguably, the answer is SoftBank.

Without a doubt, SoftBank understands the mobile market, and therefore would understand Sprint’s business more than DISH. Mobile is an entirely new arena for DISH. SoftBank, on the other hand, generated some $22bn in mobile revenue alone last year. To put that in perspective, that’s nearly double the total revenue DISH generated over the same period.

Meanwhile, we’d also point out that DISH’s investors already have doubts about the deal. Following the announcement, the company’s shares fell more than 5% throughout the day, though they did recoup some of the losses by midday.

Although Sprint hasn’t yet provided an official response to the DISH bid, we expect that it will staunchly defend itself against DISH, much like it is defending Clearwire against a DISH takeover.

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DataBank expands to the Twin Cities

Contact: Ben Kolada

Dallas-based DataBank has expanded beyond its Texan roots, acquiring Minneapolis-based VeriSpace. The deal is part of a growth strategy aimed at entering new markets in part through M&A. With VeriSpace, DataBank now operates eight datacenters with more than 180,000 square feet of datacenter space. DataBank was acquired by Avista Capital Partners in June 2011.

VeriSpace provides server colocation, managed hosting and disaster recovery services to enterprises. The company operates a 10,000-square-foot facility in Minneapolis suburb Eden Prairie. VeriSpace was founded in 2002 by Minnesota commercial real estate developer Dave Frauenshuh, and sits in a commercial office complex located about 12 miles south of downtown Minneapolis.

The greater Minneapolis-St. Paul metro area has seen a little bit of moving and shaking in the past few years. In May last year, Cologix picked up Minnesota Gateway and in March 2010, TDS bought VISI for $18m. In Minneapolis, competitors in the colocation market include XO Communications, VISI, Atomic Data, Cologix and Implex. Competition in the interconnection services area will most likely come from SunGard, Velocity Telephone and zColo.

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Sierra Wireless sells AirCard business to NETGEAR for $138m

Contact: Tejas Venkatesh

NETGEAR is acquiring Sierra Wireless’ AirCard business for $138m in cash, adding external modems that it will sell to mobile network operators such as Sprint and AT&T. AirCard modems plug into PC Card slots or USB ports in laptops and other electronic devices to help them connect to the Internet through cell phone networks. NETGEAR will use its global distribution capabilities to increase sales of AirCard products in emerging markets, while allowing Sierra to focus on machine-to-machine (M2M) connectivity for the ‘Internet of things’ future.

The AirCard business generated revenue of $247m in 2012, giving the deal a valuation of 0.6x trailing sales. The ho-hum valuation reflects the low-margin profile of the business as well as declining sales. According to Sierra’s regulatory filings, the AirCard business has shrunk every year since 2008, when it generated revenue of $409m. However, most of the future growth lies in parts of the emerging markets, where cell phone networks are the only way to access the Internet, due to a lack of wired infrastructure.

In its conference call, Sierra made clear that it intends to deploy the proceeds from the sale toward M2M acquisitions. That is consistent with the direction of its previous M&A activity. In December 2008, Sierra acquired Wavecom for $277m for its GSM/GPRS, CDMA, EDGE and 3G Wireless CPUs. More recently, last June Sierra purchased Sagemcom’s M2M business for $56m, adding 2G, 3G, GPRS and EDGE wireless semiconductors.

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CyrusOne’s steady rise

Contact: Tejas Venkatesh, Ben Kolada

CyrusOne, the colocation bull that has now changed hands three times since 2007, debuted on the Nasdaq today with a valuation topping $1bn. The fast-growing company was spun off of Cincinnati Bell but is still majority owned (72%) by the regional telco. Shares popped during early trading, continuing the company’s history of creating considerable wealth for each of its owners.

The datacenter company, which is structured as a real estate investment trust, sold 16.5 million shares at $19 per share, higher than its previously guided $16-18 range. The IPO raised a total of $313.5m, though underwriters have an option to sell an additional 2.5 million shares. Shares jumped approximately 10% when they hit the Nasdaq and held the gains through midday trading. CyrusOne currently sports a market cap of about $1.3bn.

CyrusOne operates 24 facilities, primarily in the Ohio and Texas markets. The company offers colocation services aimed at enterprise-class customers requiring highly available facilities, engineered for dense power and reliability. Morgan Stanley and Bank of America Merrill Lynch were joint bookrunners for its IPO.

This is the third time shares of CyrusOne have traded hands since 2007. And in each transaction, its value has steadily climbed, creating considerable wealth for each of its owners.

CyrusOne’s rising valuation

Date Liquidity event Valuation
January 18, 2013 IPO $1.3bn
May 12, 2010 Sale to Cincinnati Bell $525m
July 11, 2007 Sale to ABRY Partners $130m

Source: The 451 M&A KnowledgeBase

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Telcos playing a new hosting game

Contact: Ben Kolada

Datacenter operator Digital Realty Trust on Wednesday announced that it paid $80m for a three-property portfolio of datacenters from French telco Bouygues Telecom. The deal could signal yet another robust year in Internet infrastructure M&A, but also shows that telcos are playing different strategic cards in the ongoing hosting game.

Last year set a record in Internet infrastructure M&A deal volume with 110 acquisitions announced, according to The 451 M&A KnowledgeBase. The record is particularly notable as it comes at a time when telcos are weighing alternative options to acquiring hosting properties. With the exception of NTT Communications, which announced three hosting acquisitions last year, telcos have largely been out of the M&A arena.

In fact, as evidenced by Bouygues’ divestiture, telcos are now considering strategies other than buying or owning high-growth hosting businesses. For example, the Digital Realty-Bouygues deal is structured as a sale-leaseback transaction, in which datacenter specialist Digital Realty will own the facilities but Bouygues will lease and operate them. Other telcos, such as Cincinnati Bell, have also decided to pass their hosting facilities on to vendors more versed in the business. Cincinnati Bell is spinning off its CyrusOne hosting unit into a publicly traded entity. CyrusOne will debut on the Nasdaq tomorrow, planning to sell 16.5 million shares $16-18 each.

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