Even the most exhaustive due diligence can apparently miss the most obvious of problems.
Early last week, British broadband provider Eon Communications emerged from stealth mode by announcing that it recently secured GBP265 million (approx. $378.3 million) in a private debt and equity financing led by Madison Dearborn Partners. What was not revealed – and what was unknown to both the issuer and its investors until they were apprised of the situation by Buyouts‘ sister publication Private Equity Week – was that a publicly-traded stateside firm already named eOn Communications Corp. is none too pleased to have its trademark trampled upon.
“We weren’t aware that someone else was using our name,” said Kelly Bevan, vice president and chief marketing officer with the U.S. firm, which provides Linux-based servers and voice integration software. He added that company counsel would look into the situation and that he had already received a confused phone message asking when his company – which currently operates in the U.S. and Latin America – had decided to open up a broadband subsidiary in Europe.
Such dazed sentiments could cause problems for Britain’s newest VC darling, as the legal test for trademark infringement is whether or not a company legitimately could be confused with another, by virtue of its name or logo. Another deciding factor can be which company brought the name to market first, whether or not it was first to file official registration papers.
The most relevant issue in this particular case, however, could come down to a question of geography.
The U.S.-based wireless firm does not yet have any solid plans to move into the U.K. market, although Bevan stressed that such a move was certainly within the realm of possibility. Perhaps more importantly, the London-based start-up seems to have no interest in leaving its base, as its entire business model is predicated on the fact that it plans to offer bundled broadband services (i.e. telephone, Internet and cable television) to residential and business customers located in the technology-deprived regions of South West Scotland and North West England.
“It’s an area that’s traditionally neglected in that it is usually the last to receive new technologies,” said Ian Renshaw, chief executive of Eon Communications, who seemed unfazed by the shared name news. “What we’re going to do there is build a state-of-the-art digital-enabled network with a fiber-optic backbone.”
And, whether or not it is eventually forced to change its name, the U.K. version of Eon Communications has plenty of capital to help it lay its cable. The company’s monster Series A deal was led by a GBP57 million (approx. $80.94 million) private equity commitment from Madison Dearborn. The GBP110 million (approx. $156.2 million) venture tranche also included GBP30 million (approx. $42.6 million) from TD Capital Communications Partners, GBP13 million (approx. $18.46 million) from Incepta Partners and GBP10 million (approx. $14.2 million) from GE Capital Telecom.
The GBP155 million (approx. $220.1 million) syndicated loan portion of the deal was provided by TD Capital and the Bank of Scotland. CEA International Ltd. helped place the deal.
“We originally planned to look for high yield debt until the bottom started falling out of that market,” Renshaw explained. “Then we were told to consider going to the mezzanine market, at which point we would have needed between GBP275 million to GBP285 million. That market also proved too difficult, so we just decided to decrease the amount and take some more equity.”
The private equity transaction, however, was also not without its share of pitfalls. Most notably, the original lead VC backer pulled out due to concerns over telecom market instability.
“There was an earlier party that decided it had a problem with the asset class, but we decided to stay in and increase our investment because we felt strongly about the company,” said Jose Brena, a managing director with TD Capital. “We had done a lot of work with Madison Dearborn in the past and they have proved to be an ideal partner for us.”
James Kirby, a managing director with Madison Dearborn, said his firm is still a supporter of the cable business and that it was especially intrigued by Eon Communications’ target market. “Only half of UK homes have a cable provider, so there is a lot of opportunity there,” he said.
Neither investor had heard of the U.S.-based Eon Communications, although they both argued that the apparent differences in target market should help their newest portfolio company steer clear of legal hassles.
The UK company’s business plan is now fully funded and it now must get down to the business of building a business. Eon Communications plans to have a 240-person staff in place by later this year, and to have signed up its first customer within six months. In the end, it hopes to serve approximately 325,000 residential customers and 25,000 business customers.
The company does not plan to engage in any additional private financings.