RealTime IT News

Covad Nabs BlueStar for $202 Million

In an aggressive move to expand its digital subscriber line services beyond major metropolitan service areas, Covad Communications Inc. Friday reached a definitive agreement to acquire privately-held BlueStar Communications Inc.

Nashville-based BlueStar Communications provides broadband and Internet services to small and medium-sized businesses throughout the Southeastern U.S.

The all-stock transaction is valued at $202 million. The deal calls for eight million shares of Covad common stock plus the assumption of BlueStar's existing debt. Up to five million additional Covad shares may be issued to the BlueStar stockholders if certain performance targets are met by the end of next year.

Looking to tap into historically underserved markets, Covad has an opportunity to enhance its operating margins in less competitive areas in the Southeast.

Robert E. Knowling Jr., Covad president, chairman and chief executive officer, said the deal is an extension of its small business broadband service goals.

"We have installed well over 100,000 broadband lines and the key to scaling our business and installing millions of lines is to rapidly expand our network footprint and the way we deliver broadband services," Knowling said. "Acquiring BlueStar will allow us to accelerate our nationwide deployment, increase our distribution methods, and deliver enhanced broadband solutions to small businesses."

BlueStar offers DSL connections from more than 250 central offices located in Alabama, Florida, Georgia, Kentucky, Louisiana, Mississippi, North Carolina, South Carolina and Tennessee.

Robert E. Dupuis, BlueStar chairman, said being acquired by Covad would enable it to align with the nation's leading broadband DSL company.

"We are looking forward to integrating our businesses so that we can quickly and more efficiently bring turnkey broadband solutions to small and medium-sized businesses in smaller, under-served areas," Dupuis said.

When BlueStar is integrated into Covad's DSL network, Covad will be able to reach more than 40 percent of all homes and 44 percent of all businesses in the nation. On a combined basis, Covad will be able to provide broadband services out of more than 1,800 central offices throughout the country.

Covad's Knowling said its goal is to provide homes and businesses with more choice in how they get broadband service, and enhance the company's bottom line.

"By taking advantage of BlueStar's sales approach, we will be able to better serve the needs of small businesses in secondary and tertiary markets in the Southeast, Knowling said. "This direct sales model will increase total revenues by adding higher revenue lines to the business mix, but will lower our 2000 line growth to roughly 330 percent and reduce 2001 line growth to roughly 150 percent."

"We expect this tradeoff will generate higher company revenues and higher returns on installed lines for our shareholders," Knowling added.

In conjunction with the acquisition announcement, BlueStar intends to withdraw its registration with the Securities and Exchange Commission for an initial public offering.

The companies anticipate closing the transaction within 60 to 120 days subject to regulatory approvals and other customary closing conditions. BlueStar will operate as a wholly owned subsidiary and BlueStar head Robert E. Dupuis will continue to lead the business unit.