Reuters
Paetec to buy US LEC in $450 million deal
Monday August 14, 12:45 pm ET

NEW YORK (Reuters) - Privately held telecommunications services provider Paetec on Monday said it agreed to buy US LEC Corp. (NASDAQ:CLEC - News) in a deal worth about $450 million excluding debt in the latest merger aimed at fending off pressure from a consolidating industry.

Shares in US LEC jumped 8.39 percent following the announcement.

Both companies offer communications services such as voice-over-Internet to medium- and large-sized businesses. They said there would be overlap particularly in the northeastern United States.

According to the deal, the two companies will become subsidiaries of a new public holding company, New Paetec, with an enterprise value of $1.3 billion including the assumption of debt. The new company will continue trading under the Nasdaq symbol "CLEC."

Both companies compete with top telecommunications providers AT&T Inc. (NYSE:T - News) and Verizon Communications (NYSE:VZ - News), which have been bulking up through acquisitions in the past year amid a shift to wireless and Internet communications.

AT&T is set to acquire BellSouth Corp. (NYSE:BLS - News) while Verizon took over long-distance carrier MCI in January.

Paetec and US LEC forecast cost savings of $25 million in the first year after the close of the deal, which they expect by year's end, and $40 million a year beginning in 2008.

"This is a great combination, since there is overlap in some of the territories we service, and in our network and infrastructure, in addition to the traditional, administrative and personnel synergies," Paetec Chairman and Chief Executive Arunas Chesonis told Reuters in a phone interview.

The companies also said they expect unspecified revenue synergies as they reach into each others' territories.

"New Paetec" will operate in 52 of the top 100 U.S. metropolitan service areas, particularly the eastern part of the country.

Combined revenue from continuing operations is estimated at nearly $1 billion, with adjusted earnings before interest, tax, depreciation and amortization of $187 million.

Under the deal, US LEC shareholders will receive one share in the new company for each US LEC share they hold, in aggregate owning about one-third of the new holding company.

Investors in privately-held Paetec will receive 1.623 shares in the new company for each share they already hold, bringing their stake to two-thirds.

Deutsche Bank Securities Inc. Merrill Lynch & Co. and CIT Group Inc. will provide $850 million in financing for the deal, including refinancing both companies' debt.

US LEC has also entered into an agreement to buy back its Series A preferred stock held by private equity firms Bain Capital and Thomas H. Lee Partners for about $268 million.

US LEC shares gained 38 cents to $5.15 on the Nasdaq after trading as high as $6.07 earlier in the session.