Arlington Snatches Its First Buyout –

While PSINet Inc., and many other telecommunications companies for that matter, are falling on hard times, buyout firms are taking notice and reaping the benefits of their troubles.

Most recently, Arlington Capital Partners, a Washington, D.C.-based firm, purchased the global solutions division of PSINet, one of the first and biggest Internet service providers (ISPs) in the U.S. PSINet, with a stock price of $0.19 per share at press time, down from $35 mid-last year, has begun to divest itself of non-core assets in an effort to avoid filing for Chapter 11 bankruptcy (like several of its peers).

This division of PSINet assists its clients in tapping into the benefits of global reach through its information technology services with professionals onsite (at client locations), offsite (at company technology centers in the U.S.) and offshore (at company technology centers in India).

Michael Lustbader, an associate at Arlington Capital, declined to provide the transaction price Arlington paid for the company, which is now operating as SignalTree Solutions. However, the value of the deal is bound to be smaller than the $285 million price tag found on GTCR Golder Rauner’s acquisition of another one of PSINet’s divestitures earlier in March (Buyouts March 26, p. 1), considering that Arlington Capital tries to put $20 million to $75 million of equity into a deal.

Lustbader confirmed that the SignalTree Solutions deal was smaller, but declined to provide specifics, except to say that “if SignalTree had been a little larger, it probably would have fallen more into our sweetspot for buyout deals.”

SignalTree generated north of $60 million in revenue last year. Debt for Arlington Capital’s buyout of the company came in the form of a working capital facility from PNC Business Credit – a group that is also a limited partner in Arlington Capital’s fund. This relationship made getting the debt financing a little easier in the uncooperative lending market, Lustbader said.

Arlington Capital, which closed its debut buyout fund on $452 million early last year, identified the IT sector as one it would like to explore based partially on the slowing economy’s effect on people’s interest in “getting the most value for their services,” Lustbader said.

SignalTree jumped out at the firm over its competition, he added, because its offshore rates provide a greater service at lower bill rates. The firm also liked the company’s senior management and partnered with them on the deal.

Seeing that the company had been around since 1982, Arlington Capital decided it was the right company to be investing in, in the IT space.

“The key to this type of offshore model is to have a seamless integration between the work that’s done onsite in the U.S., offsite in the U.S. and offshore,” Lustbader said. “It takes a long time for companies to be able to develop and that’s why SignalTree looked especially good to us.”

Arlington Capital will be looking for add-on acquisitions for SignalTree and has committed a portion of its fund to the IT space.

“We look for future investments that can deliver the same compelling value propositions that SignalTree’s clients spoke about when we talked to them,” Lustbader said.

This transaction marks Arlington Capital’s first buyout deal, although it has completed two minority stake deals, also in the telecom area.

In other Arlington Capital news, the firm in February added Perry Steiner as a managing director. Steiner was previously president of the e-commerce firm Digital River, a Nasdaq-listed company.

Steiner is the third partner to be added to the firm for his operating experience, which has become increasingly important to firms investing in the telecom and technology space.

Other partners at Arlington Capital include Paul Stern, former chairman and chief executive of Nortel Networks and co-founder of Thayer Capital; Ray Smith, former chairman and chief executive of Bell Atlantic; Robert Knibb, formerly with MacAndrews & Forbes Holdings; and Jeffrey Freed, formerly of Oak Hill Capital Partners and Westbury Capital.