Under the terms of the deal, Paetec will swap 1.3 of its common stock shares for each McLeod share. Paetec will also assume $65 million in debt.
The transaction creates a company with an estimated $2.7 billion enterprise value and is expected to produce cost synergies of approximately $20 million in the first year following the closing, and run-rate synergies of approximately $30 million during the second year post-closing.
The addition of McLeod will increase Paetec’s subscriber base by almost a third. McLeod operates in Denver, Detroit, Phoenix and other U.S. cities. Paetec operates phone networks for businesses, but the McLeod purchase will allow it to also offer telephony and high-speed Internet access services over McLeod’s fiber-optic network.
“This transaction is squarely in line with our corporate strategy and positions Paetec as one of the largest nationwide competitive communications providers serving business customers,” said Arunas A. Chesonis, chairman and CEO of Paetec, in a prepared statement. “We’ll now have nearly 4,000 employees and we plan to increase our presence into 82 of the top 100 MSAs in 2008. With this combined footprint, we offer a compelling alternative to the legacy carriers.”
McLeodUSA’s fiber network contains approximately 13,000 intercity route miles and about 4,000 metro route miles. The combined company will operate 77 traditional voice switching facilities and 39 IP soft switches. McLeodUSA has operations in 20 states, while Paetec operates in 23 states and the District of Columbia.
McLeodUSA was founded in 1991 by former chairman Clark McLeod. It went on a fiber buying spree earlier this decade before the economic downturn and dotcom bust hurt the company’s bottom line and led to the demise of several fiber companies, including Enron. McLeod has declared bankruptcy several times, and after going private it announced in March that it would start selling its shares to the public again.