EON Communications, a cable start up company, has secured a GBP265 million debt and equity package proving ample funding is available for the right telecoms deals.
The equity portion, totalling GBP110 million, was co-led by the London office of TD Capital Communications Partners and Madison Dearborn Partners. Bank of Scotland and TD Securities arranged debt to the tune of GBP155 million. The transaction is one of the largest of its type to have completed recently. With the funding, EON Communications plans to develop a digital broadband communications network covering South West Scotland and North West England – the largest remaining area of the UK currently without a comprehensive cable network.
Securing GBP265 million for a start-up is no mean feat at the best of times and with funding conditions currently restrictive for telecoms EON has travelled a long and rocky road to close this round of financing. The company began early in 1999 when Colin Clapton, now EON’s chairman, seized the opportunity to purchase the cable franchise for South West Scotland and North West England.
Clapton has both financed and operated cable companies in the US and honed in on the potentially lucrative opportunity for a Greenfield communications network in the area. He is currently president and CEO of US cable management company MCM Cable Partners. He previously headed the media and telecoms division of Fleet Financial Services and was also responsible for setting up, and later selling, The Marks Group, a cable TV company. Being based in Boston he had few UK connections at the time but was introduced to Ian Renshaw through a mutual friend before the end of the year.
Renshaw proved to have the experience needed to co-ordinate the practical realisation of the project and is now CEO of the company. A native Scot he knows the area well and has had ambitions to develop the cable network there for some time. Much of his experience was gained as managing director of residential services for ComTel, a UK cable operator. Renshaw was part of the team, which built the business from GBP0.6 million to GBP118 million in five years. NTL acquired ComTel in 1998.
Other members of EON’s senior executive team include Alan Burgess, Greg Brown, Christopher Webb, Paul Beeby and Stephen Packer, who have gained experience at ComTel, NTL, BT and Eurobell. At the end of 1999 Renshaw and Clapton appointed Communications Equity Associates International Ltd (CEA) to assist with the fundraising.
In EON’s year-long fundraising campaign the company saw between 25 and 30 VCs. Having strong connections with US investors, Clapton recommended the company look at investors on both sides of the Atlantic. The team spent a week presenting to VCs in the US and although they also saw around ten UK investors EON’s final backers were all of American origin.
One of the factors that slowed the funding process was the withdrawal of a US VC which had been negotiating with EON for six months. Looking at market conditions, in particular the slump in NTL’s share price, the firm decided EON was too great a risk. Also at this time EON had in place a debt structure including a mezzanine portion. Investors felt that this was too expensive and might jeopardise their IRR. The debt portion was modified at the beginning of the year and funding gathered pace.
Madison Dearborn Partners and TD Capital Communications Partners, who both invested through their London offices, were enthusiastic about the deal from the outset. Respectively, they committed GBP57 million and GBP30 million in equity. Incepta Partners invested GBP13 million and GE Capital Telecom invested GBP10 million. The equity financing will be put to work first and then the GBP155 million debt, which is structured in two syndicated tranches arranged and underwritten jointly by Bank of Scotland and TD Securities.
The first is a GBP135 million senior debt tranche repayable in four to five years. The second is a secure junior tranche of GBP20 million at a higher interest rate and with no amortisation. This isn’t repayable for ten years. The senior debt is now fully syndicated to nine banks. Norton Rose advised on the debt facility.
TD Capital and Madison Dearborn both specialise in the communication’s sector and the commitment to the concept of cable displayed by the VCs was crucial for Renshaw. “They’ve been exceedingly supportive of us, our plan and our team,” he said.
Jose Brena, managing director of TD Capital Communications Partners, is clearly committed to cable. His faith in the industry stems from his involvement, through GE Capital, with Cableuropa/ONO in Spain and NC Numericable in France. Although he left GE Capital for TD last year he still takes a keen interest in Cableuropa. Brena’s confidence was evident as he described EON as a “pretty secure, safe start-up.” The appeal of the company lies in its experienced management team and their proven business model.
EON is entering a mature market, setting up in a Greenfield location with very little competition. Brena said: “This deal was one of the most rational processes, the team got along so well and everyone was reasonable.” He was positive about TD’s role in the future development of the company: “I think we can bring a great deal of knowledge to EON, both institutionally and individually.”
EON is TD Capital’s fourth and largest investment in Europe since it set up in the UK last year. Although EON is its only European investment in the cable sector, TD has experience gained Stateside (Prime Communications).
Brena said the European team is currently working on another European deal, which involves a CEO that he has backed before.
James Kirby led the deal for Madison Dearborn. The London-based managing director said: “EON is very representative of the deals we’ve made.” These include several cable companies, Falcon First Communications (US), GigaRed (Argentina), PrimeCable Alaska and Completel Europe.
Kirby’s seat on the board of Completel, a CLEC (competitive local-exchange carrier) operating mainly in France and Germany, has provided him with experience valuable to EON. The VC first invested in the company as a start-up in 1998 and now owns a 40 per cent stake. Kirby will take a seat on the board of EON along with his colleagues Wolfgang Schwerdtle and Gregory Share.
Kristen Rosenbaum of TD Capital and one executive each from Incepta and GE Capital will also join.
The company is now fully funded. Renshaw says: “It was always our plan that we would require a fully funded company and not have to go back to the market.” With the market for telecoms funding likely to contract further in the future the prospect of returning to the fundraising circuit was understandably unattractive. TD Capital and Madison Dearborn were both supportive of EON’s all-or-nothing funding goal. Kirby of Madison Dearborn says:
“We didn’t want to build half a bridge.” The company’s thorough funding should boost confidence in EON and ensure it can develop. Brena highlighted problems experienced by companies such as NTL. Its share price declined, he believes, in response to a funding gap.
Renshaw anticipates EON will have its first customer within six months. He said: “It’s a tall order but we’re fairly confident of meeting this target.” Currently working from temporary offices in Oxford, the management team is finalising the details of the network’s construction. There is currently an over-abundance of cable in the ground and several of the UK’s existing cable providers already have skeleton cabling running through the region. Renshaw said: “We are laying most of the network ourselves but we are currently in discussions with carriers to lease fibre capacity from them.” He anticipates that the area running from south of Glasgow and including all of Cumbria will be comprehensively covered in three years.
At first EON will concentrate on laying cable in the most densely populated parts of the region, which include Carlisle and Dumfries, and then expand the network outwards. Ultimately the company hopes to reach 325,000 homes out of a potential 500,000 and 25,000 businesses. Brena is also optimistic about EON’s business plan “It is achievable but aggressive,” he says. Renshaw is working to establish headquarters for EON in the service area where, it is estimated, the company will create in excess of 200 jobs
in engineering, technical support, sales, marketing and customer service.
The company will provide triple play services to residential customers – a single price package consisting of telephone services, digital TV and Internet access. EON will be competing mainly with BT and BskyB but will be the only company in the area to provide all three services as one package. Bundled communications services will also be available to businesses. SMEs are expected to be the main customers with a high demand for telephone and high-speed data services. The company may offer other providers access to its network to supply businesses with a suite of office services.
Another milestone, which the company is aiming to achieve in three years, is a positive EBITDA. Once the cable market within EON’s local area is saturated Renshaw and the company’s backers might look at expansion further afield. About 12 million homes in the UK currently have cable services available to them and although it is not practical to lay cable to all homes there are still some relatively undeveloped areas of the UK. EON’s catchment area also borders on the Liverpool-Manchester conurbation, which entails many possibilities.
Although the company and its investors make clear they’re in it for the long-term, future exit possibilities look healthy. There are opportunities for expansion and acquisitions or a trade sale such as NTL’s 1999 acquisition of Cable & Wireless. Brena suggested in the future EON might be an ideal acquisition for a US or European cable operator looking for an entrance into the UK market.
It’s clear that EON’s Greenfield site is of key importance. For the investors it provides security and Renshaw is looking forward to working on a blank canvass. Starting from scratch the company can avoid the legacy issues that affect acquiring companies like NTL. Renshaw can build on his past experiences, taking with him the best practises and hopefully leaving the problems behind.