For many people, leaving their hometown is viewed as an important symbolic step toward making their mark on the world. Robert Berger, however, feels otherwise and now has a new $275 million worth of investor confidence backing him up.
At 47-years-old and living just three miles from the suburban Maryland town in which he was raised, Berger is currently the CEO of CityNet Telecommunications Inc., a broadband company that has begun raising industry eyebrows by installing dark fiber within existing urban sewerage tunnels. The Silver Springs, Md.-based company – which was largely borne out of Berger’s unpaid experiences as a pension fund trustee and commissioner for the Washington Suburban Sanitation Commission – recently closed its second round of private financing with $175 million worth of private equity financing and $100 million in a senior secured credit facility.
“The Holy Grail of telecom has always been the literal last mile,” Berger said. “What we’re doing is similar to what was done in the late 1980s when fiber optics were installed inside of the abandoned coal tunnels that run under Chicago. If there were coal tunnels under every city, we’d use those… but there aren’t so we’re going into the sewers.”
And investors seem to have seen the far-reaching potential for Berger’s novel approach, even if none of them actually chose to personally delve into the sewers during due diligence.
“Various companies have tried using public infrastructure as a conduit in various contexts, but I think that the CityNet approach is the strongest out there,” said Bruce Rosenblum, managing director with The Carlyle Group, which led the Series B deal’s oversubscribed equity portion with a $60 million investment.
Michael Moon, a principal with Berkshire Partners – which pumped $35 million into the equity transaction – added that the use of actual fiber is a significant differentiator from competitors relying on wireless or DSL technologies. “Fiber is the gold standard in this business,” he said.
Other new participants on the equity side included Trimaran Capital Partners, Great Hill Partners and Fay Richwhite. Series A backers Telecom Partners and Crescendo Ventures each committed an additional $15 million. CIBC Capital Partners, which also had been involved on the last round, chose not to participate directly and, instead, pitched the deal to affiliate fund Trimaran. CIBC declined to comment on the deal .
Credit Suisse First Boston placed a substantial portion of the Series B preferred tranche, although neither it nor any of CityNet’s equity investors participated in the issuer’s debt financing. The players in that deal are being kept under wraps due to confidentiality agreements, although they will likely be revealed next month.
Digging The Innovation
Like most telecom infrastructure providers, CityNet must receive various permits in order to install its technology. Unlike its competition, however, the company plans to give municipalities back a small percentage of the revenue it receives from carrier customers after the fiber is installed.
Moreover, the company which uses robotics to install stainless steel alloy rings that contain the cable will provide local governments with free cleaning, maintenance and access to photographic images of the actual sewage pipes.
Thus far, the company is already building out its system in Albuquerque, Omaha and Indianapolis. It also is in discussions with 28 additional cities like Dallas, Washington, Chicago, and St. Paul, Minn.
It also has lined up one undisclosed European city and has a London office which is facilitating talks with Dublin, Ireland. The European effort may prove especially fruitful as the CityNet solution does not require streets to be dug up, an increasingly common occurrence that has become a topic of popular frustration among Europeans.
“You won’t see us cutting up the street with 20 crewmen stopping traffic in the middle of the day,” said Deborah Hoopes, CFO with CityNet.
It is important to note, however, that the municipalities themselves are not the customers. Instead, CityNet is targeting everything from competitive carriers to former incumbents to long-distance companies and cable and Internet providers. To protect themselves from entering into client agreements that could jeopardize their municipal relationships, however, CityNet is carefully vetting potential carriers to make sure that they can follow through on the required leases.
CityNet does not expect to need any future private financing, and doesn’t even seem terribly interested in an eventual public offering.
“This is a fully-funded business plan,” Hoopes said. “There are no plans to go public and we’re just going to take this money and concentrate on getting customers and building our business.”
Berkshire’s Moon echoed that sentiment, adding that the only need for new capital would come about due to unexpected growth or slowdowns in CityNet’s revenue stream.