Consolidated Buys SureWest in Deal Unlikely to Face Major Regulatory Hurdles

Consolidated Communications agreed to buy SureWest for $341 million in cash and stock, the companies said. The deal gives Consolidated SureWest’s 130,000 residential subscribers and 15,700 commercial businesses in the greater Sacramento and Kansas City areas. The combined companies will have about 1,775 employees. The move came less than two weeks after an analyst said Google could buy SureWest to boost its fiber initiatives. Consolidated will pay $23 per SureWest share, or an equal amount of Consolidated common stock. The per-share price represented a 47 percent premium to SureWest’s Friday closing stock price. The deal is expected to save $25 million in operating cost and $5 million to $10 million in capital expenditure, the companies said. Consolidated expects to incur merger and integration costs, excluding closing costs, of around $20 million to $25 million over the first two years after closing.

Consolidated doesn’t expect any major regulatory hurdles from the FCC or state public utility commissions, company officials said Monday. “We're optimistic,” said CEO Bob Currey. When California and Kansas do their due diligence, “they'll find out that we're a quality operator, and we are pretty confident that that will carry the day,” Currey said.

The acquisition will give Consolidated a 60-mile fiber ring around the Kansas City area, which powers Internet access, data center and disaster recovery solutions, VoIP phone systems, IPTV, and a wireless backhaul. It could also put Consolidated in competition with Google, which in 2011 chose Kansas City as the inaugural city for its Google Fiber experiment, promising an ultra-high-speed broadband network that would deliver speeds of up to 1 Gbps.

"We're well aware of the Google announcements and also rumors in the market,” Currey said and noted Consolidated wasn’t too concerned about the Google threat; Google’s project had no overlap with the SureWest operating territory, and the news of Google’s services had been out for close to two years and so far “Google has done nothing."

Google said Monday that Kansas City was officially fiber-ready. “Starting today, we're ready to lay fiber,” according to the official Google Fiber Blog. “At first, we'll focus on building this solid fiber backbone. Then, as soon as we have an infrastructure that is up and running, we'll be able to connect Google Fiber into homes across Kansas City."

"We're evaluating the situation and right now we see it more as an opportunity than a risk” -- there may eventually be an opportunity to provide services to Google if and when they actually began operations in the area, Currey said.

The companies hope to close the deal by the end of Q3. Before that happens, they will need regulatory approval from FCC and state authorities, as well as FTC and Justice Department antitrust approval.

SureWest is a competitive local exchange carrier in Kansas City, and both a CLEC and an incumbent LEC in various parts of California. Steve Childers, Consolidated chief financial officer, said the transaction doesn’t need approval in Illinois, Texas or Pennsylvania; but state approval will be required in California and Kansas. In California, where SureWest is in various areas both a CLEC and an ILEC, Childers anticipated an extensive review process to determine whether the acquisition is in the public interest. In Kansas, where SureWest only has CLEC status, Currey expected an easier time. Compared to ILECs, CLECs don’t face nearly as rigorous an approval process, he said.

In fact, no Kansas review is expected: Bethany Runyon, an administrative specialist at the Kansas Corporation Commission, said “SureWest is a competitive local exchange carrier and it does not receive federal or state universal service fund monies; therefore, the Commission does not have any legal authority or requirement to approve the acquisition."

The lack of regulatory revenue was actually “part of the attraction of the deal,” Currey said on the conference call. Childers said state subsidies were down to “almost zero” this year, and SureWest wasn’t drawing any revenue from a federal USF perspective. SureWest has “done a really good job of mitigating their exposure to regulatory revenue,” he said. The acquisition will help diversify the new company’s revenue further away from regulatory revenue streams, they said.

As usual for these sorts of transactions, the FCC will analyze the acquisition under the public interest standard. According to Bennett Ross, chair of Wiley Rein’s telephony practice, the public interest standard varies depending on whether the company is a CLEC or ILEC. From the CLEC standpoint, there’s no real competitive impact because the market usually ends up with a stronger competitor after than before, he said. “Part of the public interest pitch that the applications will make is you now have a company that is better poised to compete in the marketplace against the incumbent,” he said.

ILECs are different “for obvious reasons,” Ross said, and invoke a more stringent public interest standard. As a carrier of last resort, ILECs have more stringent obligations: ILECs are generally required to provide service to any customer that requests it, even if service would otherwise be prohibitively expensive. State public utility commissions have a similar public interest standard, but their focus is much different from the FCC’s, Ross said; they tend to be more concerned with the financial viability of the company after the merger, and whether the new company will have the financial wherewithal to meet service obligations.

A California Public Utilities Commission spokesperson said that while there has not yet been a decision on how to handle this acquisition, state regulations require the CPUC to examine the potential benefits of the merger, whether it causes adverse competitive impacts, and whether it’s in the public interest.