TelePacific Communications Rings In with $150M Fourth Round

As part of a qualifying heat that will eventually determine who wins the lucrative race for next-generation telecom dominance, TelePacific Communications may have taken the inside track for pole position last month when it held a $125 million first close on its planned $150 million venture capital offering. The Los Angeles-based issuer expects to complete the entire transaction within the next two weeks and is currently in discussions with approximately ten potential buyers.

Investcorp was the sole investor in the initial close and will receive a 26% equity stake in exchange for its participation. The private equity powerhouse will also receive a pair of board seats with an option for a third seat if TelePacific increases its board size from nine directors to eleven.

“We did a road show and had a lot of interest but Investcorp’s bite size was larger than most of the others,” said David Glickman, chairman and chief executive with TelePacific. He added that the company originally intended to raise just $100 million, but that Investcorp persuaded TelePacific management to up the ante.

While cynics may see such an increase as just another way for an investor to unload some excess cash from a bloated fund, an Investcorp executive involved in the deal said that the added equity was necessary given the future costs associated with the issuer’s business.

“We were of the view that there is a lot of network infrastructure that has to be built, and we wanted to make sure that the company had the wherewithal to build it without running the risk of needing to either join Nasdaq, if its troubles continue, or being held hostage by high yield,” said Mamoun Askari, a principal with Investcorp.

Prior to this deal, TelePacific had raised a total of $32 million in equity and $50 million in senior debt over three rounds of financing. Private investors purchased the first $7 million of equity, Radar Reinfrank & Co. took the next $15 million and GE Capital purchased the final $10 million in conjunction with a $50 million credit facility that the firm provided.

“Our philosophy is that we like to finance working capital via equity and finance capital expenditures via debt,” Glickman said.

Although neither Radar Reinfrank nor GE Capital have thus far even taken pro rata shares in the new deal, Investcorp’s Askari said that both firms are “evaluating the situation” and could still come in before the final close.

One factor that will almost certainly influence their decision will be if TelePacific can prove it has the winning formula to defeat the incumbent network of local exchange carriers, which Glickman estimates still control as much as 95% of the telecom marketplace.

“We are a truly convergent integrated communications provider,” Glickman said. “We can offer every product that a small or mid-sized business needs, we have both voice and data developed in-house and our delivery message is fully converged in that both our voice and data product can be carried over either DSL or a T1.”

Askari added that the company’s position as a new entrant into the market gives it an edge in that it is not burdened by antiquated legacy systems.

TelePacific currently plans to offer its service to small to mid-size businesses in the California and Nevada areas, with a national roll-out to follow.

From New Economy to Old

In addition to the TelePacific venture deal, Investcorp has also returned to its buyouts base by agreeing to purchase a majority stake in Munich-based Gerresheimer Glas AG, a supplier of glass packaging systems, from VIAG AG.

Richard Warner, a member of Investcorp’s management committee, declined to disclose a transaction price for the stake in Gerresheimer, but say that the shares themselves are currently worth approximately Euro210 million.

Gerresheimer is a manufacturer of tubular and specialty glass packaging systems. It focuses on high-end specialty container glass for the pharmaceutical, laboratory and cosmetic industries.

Warner said the company caught Investcorp’s eye because of its rapid and successful move into packaging for major pharmaceutical companies. In addition, the European packaging industry is highly fragmented and Investcorp plans to make add-on acquisitions that will play a role in the new portfolio company’s consolidation.