NEW YORK (Reuters) - US cloud communications services company Fusion Telecommunications is in the process of selecting banks to arrange financing for its acquisition of Birch Communications’ cloud and business services unit, after inking a merger agreement with the US telecommunications company in August without committed financing in place, according to two sources familiar with the matter.
A broadly syndicated loan deal could be brought to the market as soon as November, and will be supported by new and existing lenders, which were conferred with during negotiations leading up to the acquisition announcement and provided strong reverse inquiry thereafter.
Fusion management was confident that demand was deep enough and the runway until closing was long enough to enter the deal without a commitment, ensuring time to review financing proposals from several banks and choose candidates that are best suited to support its future strategic plans, one of the sources said. Closing, expected by the end of the year, is subject to financing.
“There is strong interest in this transaction, as the market increasingly recognizes Fusion’s unique and compelling single-source cloud strategy,” said Matt Rosen, CEO of Fusion. “Fusion’s acquisition of Birch is expected to create one of the largest North American cloud services providers.”
Publicly traded Fusion said August 28 it would buy Birch’s cloud and business services unit in an all-stock deal valuing the equity at US$280m. The deal would give Birch’s private equity owner Birch Equity Partners 75% of the combined company and Fusion shareholders the remaining 25%.
While the purchase would not include Birch’s legacy competitive local exchange carrier business, it would result in the assumption of Birch’s outstanding debt. The debt includes a US$418m term loan B due in 2020 that pays 750bp over Libor with a 1% floor and US$40m drawn under a US$50m revolver that also matures in 2020, according to two of the sources. Fusion’s own debt load stands at around US$100m, regulatory filings show.
Proceeds from the potential deal will be used to take out both companies’ existing debt.
Pro forma the transaction, leverage at the combined company would sit at around 3.7 times, based on US$150m of last 12 months’ combined adjusted Ebitda including US$20m of synergies and roughly US$558m of debt. On a standalone basis, Birch is currently levered around 4.4 times, based on US$100m-US$110m of last 12 months’ Ebitda, while Fusion is levered around nine times, based on roughly US$11m of last 12 months’ Ebitda.
Based on the equity purchase price for the Birch business and ownership split, the combined company’s enterprise value multiple would stand around six times.
The financing could feature a first- and second-lien structure, versus the all first-lien structures under which both companies currently operate, in order to provide a junior capital cushion.
Quotes on Birch’s term loan have climbed around 20 points since the acquisition was announced, to 91-93.5 on Friday from 72-74 on August 18, reflecting investor confidence the acquisition will occur, two other sources said.
Declining earnings at Birch’s legacy business in part pressured the loan prior to the acquisition announcement, the sources said.
Birch Equity Partners did not respond to requests for comment.
“It’s not an easily financeable deal,” one of the sources said. “But the market is very strong right now, and as it gets stronger, the chances of it happening are growing.”
Reporting by Andrew Berlin; Editing By Michelle Sierra and Leelo Parker Deo