Small Telco Draws Big Money

Small Telco Draws Big Money

By Bob Starzynski
Staff Writer

Some of Wall Street's top investors are helping Net2000 Communications land $250 million to make the leap from a small telecommunications business to a full-fledged telephone company that competes with industry giants.

To create a formidable presence in the multibillion-dollar competitive local exchange carrier (CLEC) market, Net2000 needs a lot of money. Just last month, the Vienna, Va., company closed a round of venture capital financing that company officials said brought in "tens of millions of dollars."

Company executives planned to wrap up a round of vendor financing for nearly $100 million more by July 2. And in August or September, the company plans to issue a high-yield bond offering to bring in $150 million more, they said.

Terms of the bond offering already have been drawn up with underwriters Salomon Smith Barney, Goldman Sachs and Donaldson Lufkin & Jenrette, all of New York. And the vendor financing will be through either Northern Telecom of Toronto or Lucent Technologies of Murray Hill, N.J.

"We've become our own telephone company," said Charlie Thomas, Net2000's chief executive officer and a former Bell Atlantic employee. "The money we're raising will help us through the transition and [will be used] to develop a [fiber] network between Boston and Washington."

The move to CLEC should have a dramatic impact on the company. Thomas expects his number of employees to swell from 125 to 300 in the next six months. Revenue this year should rise sixfold to $40 million, he said. "We expect to be at $500 million by 2002."

Until now, Net2000 was a sales agent for New York-based Bell Atlantic Corp. The five-year-old, privately held company made $7 million last year by helping businesses sign on with Bell Atlantic for local phone service and with several other companies for the rest of their telecom needs.

But with the scramble for local telecom marketshare, Net2000 is quickly changing the way it does business. Instead of the one-time commissions it gets for signing up new Bell Atlantic customers, the company is now reselling its own services - local, long distance, voice and data - becoming a competitor to companies like Bell Atlantic and AT&T.

Its local telephony service officially launched June 22. The regional telecom network that Net2000 is building will be partly operational by the end of July and will be completed by the end of 1999, Thomas said.

Analysts said the hot CLEC market is the place to find remarkable growth in telecommunications.

"We're nowhere near oversaturation in this market yet," said Todd Scott, an analyst with Furman Selz in New York. "All of these CLECs have less than 5 percent marketshare right now."

As the telecommunications field continues to open to competition, analysts said, CLECs will eventually gain 40 percent or more of the market now controlled by Bell Atlantic and other regional Bell operating companies.

Charlie Thomas

On June 29, e.spire Communications (formerly American Communications Services) of Annapolis Junction, Md., announced it would spend $150 million in the next year to expand its services to Atlanta, Washington, South Florida and San Antonio.

"There are a lot of new players in the market," said Cynthia Houlton, an analyst with Utendahl Capital Partners in New York. "Most of these companies aren't trying to cover the whole country. Most of them can't even completely cover a market like New York or Washington."

So far Net2000 has had no trouble securing the money it needs to build its network. Venture capital investors for the company include: Mid Atlantic Venture Fund, Vienna, Va.; Blue Water Capital, McLean, Va.; Societe Generale, a French bank with an American venture fund; PNC Equity, Pittsburgh; and the Carlyle Group, a Washington merchant bank.

As for the vendor financing, Thomas said Nortel and Lucent are currently bidding each other up and the winner will supply Net2000 with financing and assistance in building out the new network.

While Net2000 builds its network in the Northeast, the company will continue to resell services from other telecommunications companies, such as Bell Atlantic. But the company will rely more on its network over the next 18 months.

"Our target market is still the same, small and mostly midsized companies," Thomas said. "And we're focusing heavily on data communications services."

Large telecom companies do not always take kindly to sales agents becoming competitors, but Thomas calls his situation a "very amicable departure from Bell Atlantic."

"We look forward to continuing our relationship with Net2000 through our wholesale division," Mark Kutner, president of Bell Atlantic General Business Services, said in a prepared statement. In other words, Net2000 will buy capacity from the incumbent Bell company.