Yet another victim of the brutal telecom winter, onetime venture darling KMC Telecom Holdings Inc. recently elected to pull the plug on its proposed initial public offering after spending a full year in registration.
The company’s decision comes amid a flood of RW forms that have hit the shelves at the Securities and Exchange Commission this year due to foul market conditions. To date, a whopping 143 IPOs have been withdrawn from the pipeline in 2001.
The twist to this IPO withdrawal sob story, however, is that the Bedminster, N.J.-based competitive local exchange carrier (CLEC) feels it was ready for Wall Street, but perhaps Wall Street wasn’t quite ready for it.
“There have been very few telecom issues this year, and the [market] view of telecom is not favorable,” said Bill Lenahan, KMC’s chief executive. “It wouldn’t matter how great a company we had, the [telecom] sector isn’t doing very well. When you see stocks like Qwest [Communications] dip down into the teens, you know it’s not [a good time to go out].”Qwest was trading at $16.55 at market close last Thursday.
From Funding To Filing
KMC filed its initial S-1 statement in September 2000, expecting to reap approximately $200 million from an offering underwritten by Morgan Stanley.
Like most CLECs, KMC had drawn significant financing from the venture capital community in order to build its communications network in the U.S. To date, the company has amassed nearly $200 million worth of venture financing from the CoreStates Enterprise Fund (now First Union Capital Partners), Dresdner Kleinwort Capital, Lucent Technologies Inc. and Nassau Capital LLC.
For their part, KMC’s backers supported the company’s decision to withdraw its proposed IPO plans, Lenahan said.
“KMC is better-served as a private company right now. The market has hit new lows, and it was unrealistic to [try to take this company public],” said Dresdner Kleinwort’s Alex Coleman, who also holds a KMC board seat. “The market has a short-term memory, however, and we still think after a market correction, KMC would be a good candidate for a public market play in the future.”
Coulda Been A Contender
While skeptics may contest that KMC’s decision to withdraw its registration could be a sign of trouble, it truly does seem as though adverse market conditions are the only thing that has kept the company from following through on its IPO plans.
Unlike most of its CLEC peers, who went bust when that sector’s fool’s gold rush ended, KMC has managed not only to survive, but record better-than-average financials at the same time. Despite the fact that it is still privately held, KMC reports its earnings like a public company because it has publicly traded bonds.
For starters, the company met or exceeded its financial guidance in all categories in the second quarter of 2001. KMC posted revenue of $108.1 million last quarter, falling within the $105 million to $110 million revenue guideline it issued in Q1. That translates to a 12% sequential revenue growth in Q2 compared to $96.8 million in the first quarter of 2001, and 178% annual growth over the $38.9 million worth of revenue the company reported for the second quarter of 2000.
What is more, KMC reported positive quarterly adjusted EBITDA for the first time in its history. In Q2 2001, adjusted EBITDA was $3.4 million, compared with a deficit of $13.5 million for the previous quarter.
Additionally, the company had $171.2 million in unrestricted cash and cash equivalents on hand as of June 30, which marked the end of its second quarter.
Still, KMC’s balance sheet is a bit shaky in some spots, Lenahan said. “We’re not fully funded yet, and we’re heavily leveraged, which is a major concern,” he added. “But resolving our balance sheet issues is our number one priority.”
The company is expected to release its third quarter numbers in early November, and the financial guidance it has issued suggests that it is on track to address some of those concerns. KMC is projecting revenue in the $115 million to $120 million range for Q3, and EBITDA of $8 million to $12 million.
Still, the company isn’t likely to make another go at the public markets for at least another year, Lenahan said.
“At that time, we will look like a totally different company in terms of our size, scope and strategy,” he added.
Currently, KMC serves customers in 37 different U.S. cities, although the majority of its business seems to be concentrated in the Southeast and Midwest. Its primary focus is on what it calls Tier III markets, which it defines as cities and towns with populations of 100,000 to 750,000. In those markets, KMC offers traditional CLEC services such as data, voice and Internet infrastructure services to businesses, government and institutional bodies, Internet service providers, long distance carriers and wireless service providers.
The company’s chief competition in these markets is incumbent local exchange carriers (ILECs), such as Verizon Communications, BellSouth Corp. or SBC Communications Inc. The company also competes with the few struggling CLECs that remain, such as Charlotte, N.C.-based Carolina Broadband, which in June ceased construction of its fiber optic telecommunications networks and laid off approximately 80% of its workforce.
The move came after the company had collected $402 million worth of private equity financing from such backers as M/C Venture Partners and JP Morgan Partners, but could not come up with the $400 million debt facility necessary to build out its network, which was intended to provide telephone, cable and high-speed Internet access to small businesses and residences to major cities throughout North and South Carolina.
The competition, however, hasn’t really hurt KMC, Lenahan claimed.
“Our business is growing quarterly, perhaps not as fast as we’d like, but we are seeing growth,” he added. “In fact, some [of our competitors] are retracting, which plays into our strengths.”
The company also provides nationwide data services. KMC was founded in 1995.
Robyn Kurdek can be contacted at:Robyn.Kurdek@tfn.com