Cash-Rich e.spire Plans $150M Expansion
By Bob Starzynski
Having raised $635 million in the past five quarters, e.spire Communications Inc. is embarking on a major expansion plan, building out its fiber-optic network in four tier-one markets: Atlanta, San Antonio, South Florida and Washington.
Officials at the Annapolis Junction, Md.-based company announced June 29 they will spend $150 million in the next 12 months to boost infrastructure in those markets. The 3-year-old company, which changed its name from American Communications Services in April, is one of a growing number of competitive local exchange carriers (CLECs) that are giving telcos like Bell Atlantic and SBC Communications a run for their money.
With this new network construction, e.spire will, among other things, create a fiber network in Washington, D.C., and the Northern Virginia technology corridor. Once complete, that fiber will be linked in with another e.spire network that ties Washington to Baltimore. Through its progressive growth, the company has tied together operations in 32 metropolitan markets from Nevada to Florida to New York and many places in between. As e.spire's network grows, the company also becomes less reliant on the regional Bell companies for supplying wholesale services to resell.
Most of e.spire's current network infrastructure is in less populated, tier-two markets, such as Greenville, S.C.; Little Rock, Ark.; and Birmingham, Ala.
"I don't see an end to our network build out," Jack Reich, chief executive officer of the company, said last week in an interview. "I think this is the best opportunity in American business history because of the explosion for demand of data services. There is a $200 billion market opportunity here."
To date, e.spire has had no trouble capitalizing on that opportunity. The company's number of employees has blossomed from 360 to 1,000 in the past 18 months. Revenue grew to $59 million last year, up from $9.4 million in 1996. Analysts estimate the company will roughly triple revenue this year and push the figure over $250 million in 1999.
With such expectations, the company has brought in about $635 million through equity and debt financing over the past 15 months. But that much money is required if e.spire is to stay competitive in the CLEC market.
CLECs have been gaining in popularity over the past two years as the local telephone monopolies are gradually dismantled. Some of the larger players to have emerged in the market are Brooks Fiber Properties and MFS Communications, both owned by WorldCom Inc. of Jackson, Miss., Winstar Communications of New York, Intermedia Communications of Tampa, Fla., and Teleport Communications of Seattle.
While e.spire, which targets business customers in mid- and large-size cities, is one of hundreds of CLECs, the company has differentiated itself with its high-end service.
"They are offering both voice and high-speed data services," said Todd Scott, an analyst with Furman Selz in New York. "That puts them in the highest growth sector of telecom."
Scott has a "hold" rating on e.spire's stock, which trades on the Nasdaq National Market. The stock has risen from $6.38 a year ago to $22.25 July 8, giving the company a market capitalization of more than $1 billion.
Scott's hold rating is based on the valuation - he still expects revenue to increase six-fold over the next two years, and foresees the company breaking even on earnings before interest, taxes, depreciation and amortization before 2000.
But, for the time being, e.spire continues to operate deep in the red, having lost $126.6 million last year. That is part of the grand plan, Reich said.
"We took the build-it-and-they-will-come approach," he said. From the time the company installed its first switch in Georgia in December 1996 until now, more than $330 million has been spent on property and equipment installation.
But not all of the money raised by e.spire will likely go to building infrastructure. Expect some acquisitions in the near future, said Scott.
Earlier this year, the company changed the covenants of its debt structure - it is now easier for the company to raise money through debt financing and to make acquisitions.
Although Reich would only say e.spire is "seeking ways to opportunistically grow our business and widen our footprint," he did not rule out buying other CLECs.
Scott said e.spire could make two types of acquisitions. The company could buy other businesses in its existing markets to strengthen its customer base, or it could buy a CLEC that operates in another U.S. region to become more of a national company.
Regarding growing the customer base, Reich said: "Once you're in a market, that's just the toe in the water."
Either way, the company's efforts now are on building the fiber network to sustain a large number of customers who demand high-speed service at a low price.