Quadrangle, CVC To Make 50/50 NTelos Buy –

Earlier this month, two New York-based private equity shops made the trek down to Waynesboro, Va. to get a dial tone on a deal. Quadrangle Capital Partners LP and Citigroup Venture Capital (CVC) agreed to acquire NTelos Inc., a telecommunications company, through a recap valued at approximately $750 million. The two firms had been looking at the integrated communications and Internet service provider for about six months.

To finance the deal Morgan Stanley Senior Funding and Bear Stearns & Co. will act as joint lead arrangers and joint-book runners to provide a $400 million term loan, a $225 million senior secured second- lien term loan and a $35 million revolver.

NTelos will refinance its existing debt and repurchase up to 75% of its existing equity in a self-tender offer, at a price of $40 per common share. Quadrangle and CVC will then purchase up to 24.9% of the post-recapitalization equity of the company at the same price of $40 per share. Finally, following receipt of regulatory approvals, Quadrangle and CVC will acquire the remainder of the company’s equity-at $40 per share-in a merger transaction.

Step-one of the transaction is expected to close sometime in the first quarter of this year. The other two phases will likely close in Q2 or Q3. NTelos’ two largest shareholders, Morgan Stanley & Co. and affiliates of Capital Research and Management Co., have agreed to the transaction.

“Usually, the more complicated a deal is, the more value you can get out of the company in the long run,” said a source close to the transaction. All told, the two firms will be paying 6.25x NTelos’ $120 million 2004 EBITDA.

Part of the investing team’s attraction to NTelos springs from the company’s unique combination of land-line and digital PCS offerings. The mix of wire-line and wireless services in a single provider is uncommon these days among rural local exchange carriers (RLACs), said Michael Huber, a managing principle at Quadrangle. More often than not, it’s either one service or the other.

NTelos services customers in Virginia and West Virginia as well as to portions of Kentucky, Tennessee, Ohio and North Carolina. The company announced that its 2004 consolidated operating revenues are expected to be approximately $334 million. Its consolidated operating income and net income are expected to be $55 million and $39 million, respectively.

The trend of consolidation of large wireless service providers-such as the merger Singular Wireless and AT&T Wireless and the proposed merger of Sprint Wireless and Nextel Wireless-could be one trend that proves helpful to NTelos in the future. “Consolidation creates a more stable competitor environment. When you have fewer carriers, it is less likely that your services and your niche will overlap with other competitors’ services,” the source said.

NTelos’ wireless and wire-line services offer Quadrangle and CVC a comfortable degree of flexibility as far as growth options. “[NTelos] has a very nice mix of cash flow stability coming in from the wire-line side of the business, and a substantial amount of growth potential on the wireless side. That’s a somewhat unusual mix in the telecom world. You don’t usually see the best of both worlds in one company,” Huber said.

Equity from Quadrangle will come from its 2000-vintage Quadrangle Capital Partners LP, which raised $1 billion in total commitments.